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Schulman offers to acquire Ferro for $855 million

7:49 AM MST | March 4, 2013 | Rebecca Coons

A. Schulman has announced a hostile bid to acquire struggling Ferro for $6.50/share.

The offer price represents a 25% premium to Ferro’s closing price on 1 March—the last trading day before Schulman’s announcement—and a 32% premium over the average trading price over the preceding 60-day period. Schulman made the offer public less than three weeks after Ferro’s board privately rejected Schulman’s approach. Ferro maintains that its own restructuring efforts will create more value for company shareholders.

The offer includes cash payment of $3.25 for each Ferro share outstanding and $3.25 worth of Schulman common stock. The bid has a total enterprise value of $855 million, including equity value of $563 million.

“A. Schulman and Ferro are both recognized leaders in specialty chemicals with value-added product lines, similar business models, complementary competencies, markets, and applications,” says Joseph Gingo, Schulman’s chairman and CEO. “We see substantial synergies and both geographic and market growth opportunities resulting from this compelling combination, which we would hope to be a consensual transaction.” Gingo says all of Ferro’s businesses “align with A. Schulman’s core competencies with the exception of pharmaceuticals, which is not strategic to us.”

Ferro, whose shares rose 32%, to $6.87, following the announcement, says its board “unanimously determined that the A. Schulman proposal is not in the best interests of Ferro shareholders and that continued execution of the company’s value-creation strategy will deliver greater value to Ferro shareholders.”

Ferro’s earnings and share price have been under sharp pressure for the past five years as a strategy that focused on electronic materials, including solar pastes, as well as glass systems and colorants, faltered as those businesses performed poorly. The company recorded annual losses in 2012, 2009, and 2008, and only modest earnings in 2010 and 2011. Ferro announced a shift in strategy last October, including plans to divest solar pastes and a restructuring to cut expenses by $30 million/year. Former president and CEO James Kirsch subsequently resigned in November 2012. The solar pastes business was sold to Heraeus for $11 million last month.

Ferro’s performance has drawn shareholder criticism. “Left to its own devices and allowed to maintain the status quo, we are concerned that the unsatisfactory past performance of the current board and its management team is a precursor of further disappointing performance to come,” investment firms FrontFour Capital and Quinpario Partners said in a January letter to Ferro management.

Jeff Quinn, former Solutia CEO and founder of Quinpario, tells CW that Schulman’s bid undervalues Ferro. “However, we are greatly dismayed that the board would not engage with a logical strategic buyer to determine if a transaction could be in the best interest of all shareholders,” Quinn says. “This along with the fact that the company would conduct its earnings call [last week] without even taking questions from investors are just more examples of why things must change at Ferro.”

Schulman tells CW it is having discussions with large Ferro shareholders, who Schulman hopes will pressure Ferro’s board to “continue the conversation.” It adds that the reaction from Ferro shareholders and analysts have, so far, been favorable.

Ferro separately reported a net loss of $64 million for the fourth quarter ended 31 December 2012 compared with a net loss of $61 million in the year-ago quarter. Adjusted net loss of 7 cts/share fell short a consensus of analysts’ estimates of a loss of 4 cts/share, as reported by Thomson Reuters (New York). Sales fell across all of Ferro’s business segments, driving an 8.3% drop in net sales, to $406 million.

On an earnings call with analysts, Ferro interim CEO and president Peter Thomas said that the company’s best opportunity to create value for shareholders lies in a “refocused” strategic vision. Thomas said that the company will divest or curtail investments operations with inadequate returns on invested capital, streamline core operations in order to reduce operating costs, and investing growth capital only in projects with high return potential. “Assets that cannot generate sufficient returns are being redeployed, divested, or curtailed,” Thomas added.

Analysts say Schulman’s offer is fair, citing Ferro’s subpar margins and the likelihood Schulman will be Ferro’s only suitor. “While the implied acquisition multiple of 7.0 times 2013 Ebitda is below chemical peers of 7.9 times Ebitda, we believe Ferro should be valued at a discount to its peers owing to lower margins and slower growth portfolio,” says Deutsche Bank’s (New York) David Begleiter. “Coupled with our belief that other strategic buyers are unlikely to bid owing to the lack of business overlap with Ferro, we assume Ferro will be acquired at or near the current share price.”

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