LyondellBasell buying A. Schulman for $2.25 billion in big materials shakeup

In a major global plastics materials deal, LyondellBasell Industries is acquiring A. Schulman Inc. for $2.25 billion.

LBI — based in Houston and London — is one of the world's largest producers of olefins and polyolefins, including polypropylene and polyethylene resins. Fairlawn, Ohio-based Schulman is a leading compounder and concentrates maker in North America and Europe and also ranks as one of Europe's largest resin distributors.

In a Feb. 15 news release, LBI officials said that the deal "builds upon LyondellBasell's existing platform in the compounding/composites/powders space to create a premier advanced polymer solutions business with broad geographic reach, leading technologies and a diverse product portfolio."

The transaction creates an industry-leading compounding business with combined sales of $4.6 billion and adjusted EBITDA of $446 million over the last 12 months, they added. The new business expects to capture $150 million in run-rate cost synergies within two years, creating significant value for shareholders.

The deal adds Schulman's $2.5 billion in annual revenue, 54 manufacturing sites and 2.4 billion pounds of production capacity to LBI's own PP compounding unit, which has $2.1 billion in annual sales, 18 manufacturing sites and 2.5 billion pounds of production capacity.

One of the main benefits to LBI from the deal — as seen in materials presented before a conference call with analysts — will be diversifying a PP compounding business which gets 90 percent of its revenue from the automotive market. By comparison, Schulman's top five market segments are more varied, led by packaging with a 25 percent stake.

Combining Schulman with LBI's compounding would create a unit with 53 percent of sales from automotive, but also with sizable revenue from packaging, electrical/electronics, building/construction and other markets.

"The acquisition of A. Schulman is a natural extension of our current platform," LBI CEO Bob Patel said in the release. "This combination will allow us to provide our customers with a wider range of innovative solutions while adding the ability to serve high-growth end markets beyond the automotive sector."

"This transaction ... represents the culmination of a robust assessment of strategic alternatives undertaken by our board of directors," Schulman Chairman, President and CEO Joseph Gingo added in the release.

The deal still needs the approval of Schulman shareholders and regulators, but is expected to close in the second half of 2018.

On the conference call, Patel added that the Schulman deal reminded him in some ways of when Lyondell Chemical and Basell combined in 2011 to form LBI.

"When we complete the integration of the two companies, I think you'll see greater strength on both sides," he said.

Patel added on the call that he was "personally very excited about this transaction."

"I have a lot of respect for Schulman," he said. "This is a unique opportunity to acquire a company with a great long-term reputation."

The blockbuster deal caps a troubling period for Schulman, a 90-year-old firm that began as a rubber brokerage in Akron, Ohio, and now employs 5,100 at 54 locations worldwide.

Schulman grew quickly through acquisitions under Gingo's leadership from 2008-14. He had been a board member since 2000 and took on the CEO role after a career of more than 40 years as an executive with Goodyear Tire & Rubber Co.

Business at Schulman was rocky when Gingo took the reins. Schulman's European operations had been outpacing its U.S. ones for so long that, by fiscal 2007, Europe was accounting for 72 percent of Schulman's total sales and all of the firm's profit. New York investment firms Barington Capital Group LP and Ramius Capital Group LLC also had been hammering Schulman for underperformance, leading to the departure of longtime CEO Terry Haines.

Gingo steered Schulman away from automotive and into areas like packaging and color concentrates, while evening out its global sales profile.

But the firm's $800 million acquisition of compounding and thermosets firm Citadel Plastics in 2015 — which was put in motion under Gingo — went bad after problems arose with the quality of some materials made by some Citadel units.

Those problems led to Schulman taking a $402 million charge related to the deal in fiscal 2016. They also led to the removal of CEO Bernard Rzepka and to the return of Gingo, who had retired in 2014. Schulman had been the subject of sale rumors since completing a comprehensive review of the business with Citigroup in late 2016.

For its 2017 fiscal year ended Aug. 31, Schulman had sales of $2.46 billion, down roughly 1 percent from the prior fiscal year. Profit for fiscal 2017 came in at $34.2 million, following a loss of $356 million in 2016.

Custom concentrates and services was Schulman's largest product category in fiscal 2017, generating 46 percent of total sales. Europe/Middle East/Africa was Schulman's largest sales geography in fiscal 2017, generating 49 percent of total sales.

The sale to LBI also likely will be bittersweet for Gingo, whose father worked at Schulman's first manufacturing plant. The 72-year-old Gingo has memories of meeting Schulman founder Alex Schulman at company picnics as a child.

In a Feb. 15 phone interview, Gingo said that the situation at Schulman when he returned in 2016 was far different than when he arrived in 2008.

"When I first got here, we had very little debt, so I was able to re-open a plant, buy companies and equipment and expand all over the world," he explained. "When I came back, we were $1 billion in debt and Citadel wasn't generating the profits that we had expected."

Gingo added that Schulman then went through "a robust strategic alternatives process" with its board, including the possibility of keeping the company going. When Schulman received the LBI offer, he said it was "a good offer that we needed to let our shareholders know about."

Schulman's current options also are limited because of its debt, according to Gingo.

"I could invest in the company, but acquisitions are off the table, and I couldn't close plants because of severance costs," he said.

The future of Schulman's resin distribution businesses wasn't addressed in the news release announcing the deal. The firm distributes resin for several firms in Europe,the Middle East and Africa; including PE and PP made by ExxonMobil Chemical Co. Schulman also distributes PE for ExxonMobil in the U.S. and Canada. The two firms have worked together for more than 20 years.

The fraud alleged by Schulman against Citadel's former owners "was a significant factor in [Schulman's] problems paying down our debt," Gingo said. If the Citadel deal had performed as expected, Schulman "would be continuing to grow as we did before, and would be adding onto the business," he added.

Schulman filed a lawsuit in Delaware Chancery Court in June 2016 against former Citadel owners, including Huntsman Gay Capital Partners and Charlesbank, as well as several former Citadel executives. Recent court documents listed an April trial, with no set date.

Plastics financial advisor Bill Ridenour has worked on deals with Schulman in recent years. In a Feb. 15 phone interview, he said that the LBI transaction could benefit both sides, adding that $2.25 billion was a fair price and was similar to what he estimated Schulman's value to be several months ago.

Ridenour, president of Polymer Transactions Inc. in Foxfire, N.C., added that recent U.S. tax reform both increased Schulman's value and gave LBI more funding to spend on the acquisition.

He also said that Schulman's recent profit improvement was "a pivotal factor" in the deal, and that the transaction will give LBI a good downstream outlet for its PP and PE resins.

Looking ahead, Ridenour said he would not be surprised if Schulman eliminated a large number of jobs at its Fairlawn headquarters, since those jobs could be duplicated elsewhere within LBI. He added that some smaller PP compounding assets in Evansville, Ind., might be closed, and that Schulman's thermosets business could be sold off, since it has no real match at LBI.

The failure of the Citadel deal proved to be the first step that led to Schulman's eventual sale to LBI, according to Ridenour.

"I think the Schulman board was impatient to do a big deal before [Joe] Gingo retired," he said. "I have to give Gingo credit for what he was able to accomplish, because he always was under pressure to do deals from the time he got there."

In a Feb. 15 email, market veteran Phil Karig, managing director of the Mathelin Bay Associates LLC consulting firm in St. Louis, said the LBI/Schulman deal "is at least partly analogous to what went on in the PVC business years ago, when PVC resin producers integrated downstream into PVC pipe production in order to increase their overall gross margins."

In LBI's case, he added, the Schulman deal offers LBI "a captive, in-house customer" for large quantities of PE resin while the overall North American polyethylene market "is facing years of substantial overcapacity and downward pressure on margins."

As for whether downstream integration for resin producers makes sense overall, Karig said, "these things tend to run in cycles."

"When investors periodically decide that they would rather see pure play resin companies instead of integrated companies, the pendulum will swing back toward divestment of downstream operations," he explained.

"I think this type of deal is a good way to gain competitive position in a North American market which is about to be oversupplied with new capacity," said Paul Bjacek, chemicals and natural resources research director at Accenture Research in Houston. "Exporting companies will have likely lower netbacks on their product. Therefore gaining an intermediary path to final customers could be a very good approach, especially when turning products into higher value goods.

"I have blogged/presented in the past on how the [North American] market is becoming more demanding in terms of quality and performance as it raises it's sophistication to stay competitive and innovative," he added in a Feb. 15 email. "This [deal] plays well here."

Bjacek also said that distribution and global market access "will be very important" in a new era of high and rapid North American volume growth.

Schulman's financial challenges also have affected its per-share stock price. The price peaked above $48 in early 2015, but had fallen to near $26 by mid-2017. It had recovered to close near $39 on Feb. 14.

Immediate positive reaction to the LBI deal sent Schulman's per-share stock price up more than 10 percent to almost $43 in late trading Feb. 15.