Apollo's Chemical Attraction
Ferro Corp. should give a deal with Apollo Global Management another look.
The $975 million maker of chemicals used in coatings and ceramics recently rebuffed a takeover approach from the private equity firm, people familiar with the matter told Bloomberg News. 1 It's a bit of history repeating itself: In 2013, the company turned down what it called a "low-ball" bid from A. Schulman for $6.50 a share. Given that the stock is now trading over $10, that would seem to have been a good decision. Holding out may not be so smart this time around.
Schulman made its approach at a moment of weakness for Ferro, which was in the middle of trying to hire a new CEO as activist investors sought to overhaul the board to correct chronic underperformance. Selling at a low price didn't make sense because there were still levers to pull to increase the company's stand-alone value.
Current CEO Peter Thomas has been pulling those levers since taking over in 2013. 2 He's taken a sledge hammer to costs, divested non-core businesses including pharmaceuticals and precious metals powders and set Ferro up for its first revenue gain since 2011. Ferro also struck a deal with the activists -- FrontFour Capital and Quinpario Partners -- that gave them board seats.
Ferro's problems are now more macroeconomic than of its own making. Like other chemical makers, the company's results are closely tied to global growth, which has been meandering along of late. Ferro gets 74 percent of its revenue abroad, so results have also been crimped by the strong U.S. dollar.
Before rising this week on news of Apollos approach, Ferro had lost about $600 million in market value since its peak in June and earlier this year dropped to its lowest multiple of projected Ebitda in about three years. So yes, the buyout firm was being opportunistic. But even a token 30 percent bump to where the stock was trading before news of the deal talks would amount to a higher price than analysts saw the stock reaching on its own over the next year.
To a lot of shareholders, that's got to be pretty enticing, particularly if Ferro can finagle something close to the $17 price the stock fetched at its peak in 2015. A bid at that level would imply about a 60 percent premium to Ferro's unaffected stock price. High, yes, but that would imply a multiple of about 10.5 times Ferro's projected 2016 Ebitda -- essentially in line with the median multiple 3 for recent big chemical deals.
Apollo for its part has shown a willingness to pay up for assets. It's been on a bit of an acquisition tear of late, striking deals for organic grocer Fresh Market, home-security service provider ADT Corp. and for-profit education company Apollo Education Group -- all in just a matter of months. And who knows, maybe Schulman wants to take another pass at it. Ferro sold its specialty plastics business to the company in 2014.
FrontFour, the activist investor, wrote a letter Monday urging Ferro to explore strategic alternatives, saying the company is "hard-pressed" to capitalize on its acquisition pipeline because of increasingly negative sentiment toward debt-laden acquirers. It's not that the investor is unhappy with CEO Thomas and the progress he's made at Ferro -- there just aren't as many levers left for him to pull.
It's unclear whether Ferro plans to engage in negotiations or if Apollo plans to return with a fresh proposal, the people said.
Thomas was named interim CEO in November 2012, after James Kirsch stepped down. He has officially been president and CEO since April 2013, according to the company's website.
Announced deals use trailing 12-month Ebitda multiples.
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