Ferro Corporation (FOE) – Merger Arbitrage – 8% Upside

Current Price: $20.35

Offer Price $22

Upside: 8%

Expected Close: Q1 2022

Press Release

 

Specialty materials manufacturer Ferro Corporation is due to be acquired by its private peer Prince International at $22/share in cash, $2.1b in total. Ferro’s shareholders have already approved the transaction. Antitrust consent is also likely given product portfolios of both companies have only minor overlaps and are rather complementary. Prince International positions itself as a proven consolidator in the industry with a number of acquisitions under its belt. Buyers' new owners (PE group) have a number of other portfolio investments in the chemicals and specialty materials industries. The newly appointed Prince CEO has track-record of expanding through acquisitions. Given this backdrop, the buyer is unlikely to walk away. The transaction is expected to close in Q1 2022. Downside to the pre-announcement price stands at c. 15%

The spread on this merger stood at only 2%-3% after the announcement. It started to widen during the summer - this coincided by supply chain disruptions that resulted in an overall drop in FOE's and peer stock prices. The spread later narrowed down (potentially due to the anticipated shareholder approval) before increasing again as some peers lowered their quarterly guidances. Meanwhile, FOE did not issue any statements on the future outlook and their Q2 earnings seemed positive. While these concerns are not weightless and are likely to persist at least in the short to medium term, I do not expect these are material enough to derail the seemingly highly synergetic merger.

 

Ferro

Ferro is a well-diversified producer of specialty materials, which are sold to manufacturers to be turned into products (with Ferro’s products ultimately being a small portion of the end product’s cost). The products usually come in the form of specialty pigments and colorants and many of them are functional or aesthetic coatings on metals, ceramics, glass, plastic, wood, concrete. Applications range from automotive glass to healthcare. A breakdown of Ferro's products by industry is provided below.

These products fall into two general categories:

  • Functional Coatings (specific functions in the end products), usually ~65% of total revenue
  • Color Solutions (performance and esthetic), usually ~35% of total revenue

 

Prince International

Prince offers a wide range of minerals, the majority of which are manganese-related. The company offers custom-developed products for niche applications. Markets range from automotive anti-corrosion to micronutrients for animal nutrition. Due to it being a private company though, one can only guesstimate the weighting of every different product offered by the company. A comprehensive list of Prince's products and markets can be found on their website.

Apparently, Prince International has done a fair share of acquisitions and positions itself as a proven consolidator:

Prince has grown from a small, regional processor of minerals to become one of the largest global manufacturers of specialty mineral additives and inorganic chemicals. The Company is a proven consolidator, having closed 19 add-on acquisitions since 2003, and has built a multinational manufacturing presence with locations across six continents.

Ferro acquisition is the second transaction since Prince was acquired by PE firm American Securities from Palladium (another PE investor) back in 2018. Also it is the first one after the new CEO Michael Wilson was appointed in Nov 2020. Michael previously served as CEO of Ingevity Corp - under his realm the company made a number of sizeable acquisitions. American Securities seems to have a number of other chemicals and specialty material investments in its portfolio. With new PE owners and new CEO with a deal-making track-record, Prince International should be well incentivized to close this merger.

3 COMMENTS

  1. masstab

    This analysis is quite useless, there is a serious antitrust issue here. To quote one 2015 analyst report on Porcelain: “FOE is the market leader in this relatively concentrated market, with an estimated 40% to 50% market share, and we believe FOE along with competitors Gizem Frit and PEMCO (Prince), account for ~80% of non-captive production. Without doing any research on the antitrust there is no point writing about this M&A.

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    1. Ilja

      Thanks for the heads up. I’m not that familiar with the industry and on a quick glance both portfolios seemed complimentary – so assumed these companies are not direct competitors. The initial spread also indicated that the market sees little regulatory risk. The widening of the spread coincided with the described industry-wide feedstock issues, so I guessed this might be related and potentially the reason for the spread.

      Why do you think spread stood at <2% for almost two months after the announcement if regulatory approval is such a big issue here? Have there been any news/rumors regarding regulatory hurdles in July/August that might have caused the spread to widen?

  2. masstab

    was at 2% because of interloper possibility. Once vote was done, interloper possibility was gone, and FTC blocked WLTW deal, focus moved to antitrust. Now it’s just antitrust.

    2

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