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Shares of Ferro Corporation (NYSE:FOE) rose an incredible 30.8% in Monday's trading session. The producer of specialty materials and chemicals confirmed that it has received and rejected an unsolicited proposal from A. Schulman (NASDAQ:SHLM) to acquire the business.

In a reaction to the news, shares of Ferro rose to $6.80 per share, trading 4.6% above the proposed take-out value. Shares fell back some 3% on Tuesday after the company reported its fourth quarter results. Shares of A. Schulman hardly reacted to the proposal which is surprising given that a possible deal would be significant for A. Schulman.

The proposal

Ferro Corporation announced that its board of directors received a proposal from A. Schulman to acquire the business for $6.50 per share in cash and stock. The board declined the offer, claiming that the deal would not be in the best interests of shareholders.

As the press release on Ferro's website states, "Ferro's Board of Directors, in consultation with financial and legal advisors, 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."

Fourth Quarter Results

Ferro Corporation generated fourth quarter revenues of $406 million, down 8% compared to the final quarter of 2011. All six segments of the firm reported a decline in revenues. Worst performing was the electronics materials division which reported a 22.6% decline in revenues, driven by weakness in the solar market and the general macro-economic conditions in Europe. Revenue declines were much more limited at the other divisions.

Total segmental income dropped some 61% to $3.4 million. The declines were driven by a $5.2 million loss at the troubled electronics materials division and a loss at polymer additives. On top of that came $40.4 million in corporate expenses, followed by another $22.0 million in restructuring and impairment charges.

All in all, the company reported a loss of $64 million for the quarter, or $0.74 per share. This was slightly higher compared to last year.

Creating Value in 2013

The continued stagnation of revenues, declining margins and one-time charges has put pressure on the company's strategy. The current strategy is not working and the offer by A. Schulman has put Ferro's management under immediate pressure to create value.

The company outlined plans to improve returns on invested capital, streamline core operations, reduce operating costs and pursue high-growth investments.

Chairman William B. Lawrence commented on the change of strategic direction, "Prior to 2012, Ferro was pursuing a growth strategy, with the expectations that the Electronic Materials business, led by the solar pastes product line, and portions of the Color and Glass business, together would deliver organic revenue growth significantly greater than GDP. In 2012, it became apparent that the strategy needed to be changed."

The company already sold the solar paste assets for $7 million and tries to reduce operating costs by $50 million over the next two years by streamlining its operations across the globe. At the same time, there is room for new initiatives and growth opportunities provided that activities generate significant returns, earn their own growth capital, and create shareholder value.

As a result of the initiatives, Ferro expects to report adjusted earnings of $0.25-$0.30 per share for the full year of 2013, driven by cost savings. Adjusted earnings for the first quarter of the year are expected to come in between $0.02 and $0.05 per share.

It will be highly likely that "one-time" charges will again result in a net loss for shareholders in both the first quarter of 2013, as well as the entire year.

Valuation

Ferro ended its fourth quarter with $29.6 million in cash and equivalents. The company operates with $346.8 million in short and long term debt, for a sizable net debt position of roughly $317 million.

Full year sales came in at $1.77 billion, down 18% on the year before. The company reported a net loss of $263.5 million, mainly driven by $225.8 million in restructuring and impairment charges.

The market currently values Ferro around $575 million. This values the equity of the firm at 0.3 times annual revenues.

Given the financial difficulties, Ferro is not paying out a dividend at the moment.

Some Historical Perspective

Ferro's management has failed to create any sustainable value for its shareholders. Shares have lost some two-thirds of their value over the past decade. Ferro's shares traded around the $20 mark until the crisis of 2008 which send shares towards $1 in 2009. Shares bounced back to $15 by early 2011, and fell back to lows of $2.50 in November last year. Shares have risen some 60% already in 2013 on the back of asset sales and the unsolicited offer from A. Schulman.

Between 2008 and 2012, Ferro has seen its revenues fall by little over 20%, from $2.25 billion in 2008 to $1.77 billion in the past year. The company has reported a modest loss in 2008 and 2009, followed by a large loss over the past year on increasing restructuring charges. Worse for shareholders, they have seen significant dilution as the number of outstanding shares has doubled over the time period.

Investment Thesis

I guess many investors are in doubt whether to tender their shares. While shares trade 70% below the highs of the decade, investors have the opportunity to sell shares at levels some 150% above the lows of November 2012.

Analysts at Deutsche Bank implicitly advice shareholders to tender their shares to A. Schulman. Analysts note that the implied EBITDA multiple of 7.0 times 2013's expected EBITDA is slightly below the average valuation of its peer group at 7.9 times annual EBITDA. Despite the small discount, the offer represents good value given the poor margins of the business and the slower growth pace.

Given the poor track record of management, I would lean towards tendering shares if I had any, to Schulman. Management's ambitious plans to cut costs and divest assets to create shareholder value, have to little substance and lack credibility. In its earnings call, Ferro's management furthermore said they target revenue growth of 4% per year till 2015, on which the company could earn between $0.75 and $0.85 per share. There are no solid foundations for these optimistic targets.

Furthermore management's track record has not been that good as the company has taken multi-million in restructuring charges over each of the past years. Additionally, investors should note that the number of shares outstanding has doubled in recent years, and not simply look at the share price level.

The pressure is on. It is up to management to create value in the short term, otherwise Schulman's offer will look too good to refuse to its shareholders. Management does not have credibility on its side. I think its projections and plans are too optimistic and vague, and would therefore tender shares, if I had any, at these levels.

Source: Ferro Corp. Management Has Little Credibility Moving Forward As A Standalone Company