RPM eliminates its 'poison pill' provision

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The idea of Medina, Ohio-based RPM International being bought might have become easier to swallow for those who once believed such a situation was unthinkable — or for any potential acquirer.

Already under the influence of activist Elliott Management, the specialty coatings and sealants company has thrown out its "poison pill" takeover defense, and its stock has hit an all-time high. A potential acquisition of the company has added a premium to RPM's share price, longtime observers say.

"If every major private equity group in the nation has not had them on their watch list by now, this will cinch it," said Bill Ridenour, president of investment banking firm Polymer Transaction Advisors and a longtime adviser to northeast Ohio companies. "I look for the company to be sold within a year after the cost-cutting measures are completed."

A poison pill is a corporate strategy to ward off acquisitions, particularly by would-be hostile acquirers. They typically work by allowing existing shareholders to buy more shares, usually at a discount, once a potential acquirer buys a large amount of stock. That has the effect of diluting the shares for all shareholders, making it more difficult and expensive for a hostile takeover to be executed.

RPM told the Securities Exchange Commission on Aug. 17 that it had terminated its rights agreement, which was already due to expire in May 2019. A company spokeswoman confirmed that the filing signified the end of the company's "poison pill" provision, though she did not elaborate beyond that.

"Our board elected to terminate the rights agreement [poison pill], which was scheduled to expire early next year, in response to changing corporate governance practices and investor input. Few companies continue to maintain rights agreements, like our former rights agreement, that have not been approved by stockholders," said Kathie Rogers, RPM manager of investor relations, in an email correspondence.

But RPM is not in the situation of most companies. It has activist shareholder Elliott Management — by invitation or not; RPM has not said — helping guide the company. And neither RPM nor Elliott may have any incentive to tamp down speculation of a sale, because it drives up the price of the company's stock.

RPM said in June that it had reached an agreement with the $34 billion hedge fund — without disclosing Elliott's stake in the company — to review the Medina company's business practices and install two new members to its board of directors. That review has resulted in the cost-cutting program referred to by Ridenour, which is ongoing. Also, since Elliott came on the scene, RPM has undertaken a limited streamlining of its senior management, which included the early retirement of Chief Operating Officer Ron Rice, announced July 6.

The appearance by Elliott already had the markets thinking RPM could be a potential acquisition target. RPM's share price shot up almost 25 percent per share in the month after the Elliott announcement and has continued to rise.

Since RPM's SEC filing was reported Aug. 20, RPM's stock price has risen another $1 per share to about $66 at the close of trading last Thursday, Aug. 23. It was trading at fewer than $53 per share two days before the company announced it was working with Elliott Management.

"RPM actually has set new, all-time highs," noted analyst Elliott Schlang of Cleveland-based Great Lakes Review, who has followed and owned shares of RPM for decades.

"Institutional accounts we work with love a stock with a catalyst. RPM always had a good reputation, but suddenly people think there's a timing issue with a catalyst involved with Elliott and the acceptance of [eliminating] the poison pill," Schlang said.

Like many who have admired RPM under the Sullivan Family — current CEO Frank Sullivan is the third generation of his founding family to run the company — Schlang said he's surprised by the company's apparently willing embrace of Elliott. And he sees recent developments as part of a new scenario for the company created by the arrival of the activist investor group, which has usurped several CEOs at other companies and often triggers significant corporate changes at its target businesses.

"Because of the news of Elliott's involvement, the stock has been on a steady uptrend and that's been emphasized further by the poison pill," Schlang said.

While the poison pill SEC filing alone doesn't mean an acquisition is going to happen, Ridenour said, he's convinced it's likely after decades of thinking such a scenario was all but impossible.

"My view is colored by my knowledge of the Sullivan family and their strong entrepreneurial spirit. In that respect, I am surprised. However, they no longer had a controlling interest in the company, and [stuff] happens when you go public and expose yourself to the open stock market and the denizens that prowl it. They were performing somewhat sluggishly and a Gordon Gecko type surfaced to 'HELP' them," Ridenour said via email.

He also said he thinks the early retirement of the poison pill provision has meaning in the case of RPM.

"The fact is that someone on the board had to raise the topic, move that it be removed, there was a discussion and the board voted to remove it," Ridenour wrote to Crain's Cleveland Business, a sister publication of Plastics News. "In this instance, it is another indicator that RPM will be sold after the leading shareholder upgrades its profitability."

Schlang agrees that RPM likely didn't take the action on a whim, but instead for some purpose. He also was surprised, though he's not in favor of poison pills. He said they tend to protect poor managers, and he doesn't think RPM ever needed to do that.

"I never would have guessed that, given the culture of the Sullivans, they would be removing the poison pill, as much as I think they should be removed," Schlang said.

Schlang won't go as far as to predict a sale anytime soon. He likes the stock for more fundamental reasons. But he said he now also thinks an acquisition of RPM is "conceivable" for the first time. As an investor, he's happy for the premium the stock gets from thoughts of a takeout, he said.

"The [elimination of] the poison pill is just another positive," Schlang said.

If a sale happens, Ridenour predicts it will be done all at once, because he thinks RPM is worth more as a single company than it would be if it were broken into pieces — pieces the Sullivan family took decades to assemble.

Unlike A. Schulman, which Ridenour said recently sold itself from a position of relative weakness with at least one underperforming business unit, RPM is a healthy company that only needs to trim some costs. Ridenour thinks it will not have to do much house cleaning if it decides to sell.

RPM has built itself up over the decades by being the acquiring company, and that's left it with a mix of subsidiaries and brands. Rustoleum paints, DAP caulks and sealants, Tremco roofing and Carboline corrosion-prevention coatings are among the hundreds of brand-name products the company sells to residential, industrial and specialty markets.

It's plastics holdings include industrial flooring and roofing makers, polyurethane foam and industrial floor cleaning system suppliers.

"I know of no business unit within RPM that is an ugly, underperforming, slow stepchild of the parent company. But there may be one hidden below their line of financial reporting. … In contrast to the Schulman sale, their value-added content is higher and their exposure to resin price fluctuations is less because they are truly a small collection of independent businesses that have a variety of business risks and variables associated with them," Ridenour said.

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