IHS Chemical Week


A. Schulman bids for Ferro

3:35 PM MST | March 11, 2013 | By ROB WESTERVELT

Ferro’s stumble through the past few years appears likely to drive it into the hands of A. Schulman, a Cleveland-area rival. Schulman announced a hostile $6.50/share bid last week, valuing Ferro at $885 million (p. 6).

Ferro posted losses in 3 of the past 5 years, and its stock fell 70% over that period. Ferro had focused investment and strategic attention on solar pastes, electronic materials, colorants, and glass in the hope of building a high-growth, high margin–growth franchise that would complement its lower-growth, higher-volume polymer and ceramic materials businesses. The hoped-for growth never materialized, however, and Ferro shifted strategy in late 2012. The company announced plans to sell its solar pastes business, completed last month, and CEO James Kirsch resigned in November.

Schulman, meanwhile, has grown since CEO Joseph Gingo took the helm in 2008. Schulman remained focused on polymer compounds, color concentrates, and resins but took steps to transform that portfolio through acquisitions and rationalization. The company sharply cut exposure to sectors such as high-volume, low-margin automotive applications, particularly in the United States, and made acquisitions to boost its presence in higher-value technical engineering plastics.

The acquisition multiple of 7.0 times 2013 Ebitda is below chemical peers of 7.9 times Ebitda, according to estimates from Deutsche Bank’s (New York) David Begleiter. He notes, however, that the price appears fair given Ferro’s weak growth prospects and lack of other likely strategic bidders.

Ferro argues that its own restructuring efforts will generate greater value, but it has a very difficult case to make with frustrated investors. Ferro’s own forecasts indicate that profits and growth will be constrained over the next three years as it restructures and reorients strategy.

Ferro expects full-year 2013 earnings of 25–30 cts/share. The company’s own forecast for 2015, issued last week, calls for earnings of just 75–85 cts/share with organic growth at a lukewarm 4%/year. The 2015 targets put a near-term ceiling on the stock that isn’t much above Schulman’s $6.50/share bid. Schulman’s opening bid and the hope for a revised offer are likely the only near-term catalysts that pushed Ferro’s stock price close to the $6.90/share it closed at on 7 March. Ferro has rejected Schulman’s first move, but investors may force management to the negotiating table given the uncertain prospects and limited earnings ahead for Ferro.

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