Ferro Seen Securing Decade-High Chemical Bid: Real M&A

Ferro Corp. shareholders are betting an increased takeover offer from A. Schulman Inc. and a push from activists to overhaul the board will compel the chemical company’s management to agree to a deal.

Ferro, a Mayfield Heights, Ohio-based maker of chemicals used in coatings and ceramics, said March 4 it had rejected an offer of $6.50 a share -- that it later called a “low-ball” bid -- from plastics maker Schulman, based about 34 miles (55 kilometers) away in Akron, Ohio. With Schulman reiterating yesterday it may raise the bid if it can look at Ferro’s books, the stock has traded above the offer every day as investors wager the takeover succeeds at a higher level. Credit Suisse Group AG estimates a winning bid to be $7.50 a share, while First Analysis Securities Corp. says it may be as much as $9.

At $9 a share, Schulman would be paying 68 percent more than Ferro’s stock price before any approach was disclosed, the biggest premium in more than a decade for a specialty chemicals deal larger than $500 million, according to data compiled by Bloomberg. As Ferro’s management refuses to negotiate, a plan from activists FrontFour Capital Group LLC and Quinpario Partners LLC to overhaul the board next month could help pave the way for a transaction, Elevation LLC said.

“FrontFour and Quinpario are looking out for their own interests, but those certainly align quite nicely with holders of Ferro,” Andrew Berkin, co-chief investment officer at Los Angeles-based Vericimetry Advisors LLC, said in a telephone interview. “If a company gets a takeover offer, we want management to give it serious consideration. Instead, Ferro seems to have summarily rejected Schulman. The market’s anticipating that this is just the initial step and that a deal could get done at a higher price.”

Rejected Proposal

Berkin co-manages Vericimetry’s small-cap value fund that owns shares of both Ferro and Schulman.

Schulman’s proposal to buy Ferro for $6.50 a share in cash and stock values the company at about $875 million, including net debt and outstanding exercisable options, according to data compiled by Bloomberg. The board rejected the bid, which was 21 percent higher than Ferro’s average share price in the 20 days before the proposal.

“The Ferro Board carefully considered A. Schulman’s unsolicited proposal and unanimously determined that it was inadequate and not in the best interests of Ferro shareholders,” the company said in an e-mailed response to questions yesterday. “The Ferro Board and management team believe that the continued execution of the Company’s value creation strategy will deliver greater value to Ferro shareholders.”

Activist Investors

Schulman’s trying to strike a deal while Ferro has an interim chief executive offer and tries to recover from a 56 percent two-year stock decline and a record net loss last year. Ferro is also battling activist investors FrontFour and Quinpario, which in January nominated three people for election to the nine-member board because of “historic and current under-performance.”

FrontFour and Quinpario together have said that while Schulman’s initial bid is too low, Ferro should negotiate for a better price. They said that if their nominees are elected at Ferro’s May 15 annual shareholder meeting, they will “fully explore any and all potential strategic alternatives,” including talks with Schulman.

“We believe that Ferro’s Board has done a disservice to shareholders by its outright rejection of A. Schulman’s offer,” the firms said in an April 18 statement. David Lorber, co-founder of FrontFour, declined to comment further. Missy Zona, a spokeswoman at Quinpario, said CEO Jeffry Quinn wasn’t available to comment. Lorber and Quinn are among the three nominees.

Board Slate

Schulman is probably waiting to see if FrontFour and Quinpario’s nominees win enough votes before revising its proposal, said Betty Chan, a Jersey City, New Jersey-based analyst for Elevation’s event-driven team.

“Given Ferro’s mismanagement, FrontFour will probably win their slate,” Chan said in an e-mail. “Schulman is waiting for this to happen before they make their next move. They will likely need to bump.”

Schulman CEO Joe Gingo said he’s rooting for the activist shareholders to win board seats in the hopes new directors can persuade the group to open its books. He said Ferro’s proxy statement last week includes “misrepresentation” about Schulman’s ability to complete the acquisition and about its willingness to improve the offer.

Price Negotiations

“I didn’t really appreciate the implication we gave this ‘low-ball’ offer,” Gingo said in a phone interview yesterday. “We are more than willing to talk about not just the price, but the structure.”

Since the proposal was announced, Ferro shares have traded as high as $6.99 on an intraday basis and closed yesterday at $6.76, which is 4 percent higher than the bid.

Today, the stock gained 4.3 percent to $7.05, the biggest gain since the offer was announced. Gamco Investors Inc., which owns about a 16.2 percent stake in Ferro, said today in a regulatory filing that it intends to support the activist investors’ three board nominees.

Some investors are wagering that a revised offer could be in the “mid to high” $7 level, said Elevation’s Chan. John McNulty, a New York-based analyst at Credit Suisse, said that a $1 increase to the current bid would make it “more reasonable,” according to a March 4 report.

Decade-High Premium

An even higher bid may be warranted because Ferro’s products are sold to customers in parts of the U.S. economy starting to show signs of recovery, such as construction and automobile manufacturing, said Michael Harrison, a Chicago-based analyst for First Analysis. Ferro also exited its solar paste and pharmaceutical businesses to focus on more profitable units and cut costs.

“They’re going a little bit back to basics around the remainder of the company, which is still a very vibrant set of businesses,” Harrison said in a phone interview. He estimates a takeover could get done at $9 a share, which is 68 percent higher than Ferro’s 20-day average price before Schulman’s proposal was made public.

That would rank as the highest premium for a specialty chemicals deal larger than $500 million since 2000, when Valspar Corp. paid a 126 percent premium for Lilly Industries Inc., data compiled by Bloomberg show.

On the other hand, paying more than $6.50 a share may not make sense for Schulman or add to its earnings, according to Greg Schooley, a New York-based partner in the private-equity practice at consulting firm A.T. Kearney.

‘Starting Point’

“It was a pretty good offer to begin with,” Schooley, who advises on industrial transactions and has worked with Ferro in the past, said in a phone interview.

Without a deal, analysts are projecting Ferro’s shares will climb to just $7.33 within the next 12 months, estimates compiled by Bloomberg show. That’s less than analysts project for a sweetened bid.

“Ferro does seem to be undervalued and doesn’t seem to be doing anything right,” Kathleen Renck, New York-based head of event-driven research at FBN Securities Inc., said in a phone interview. “We’re certainly hoping that FrontFour wins board seats because they would love it if somebody would buy the company. Obviously $6.50 is just the starting point.”

Before it's here, it's on the Bloomberg Terminal.