Description

The board of directors at Polymer Solutions Inc. (PYSU) reported on July 21 that they had received an unsolicited offer to acquire the company. Below is an excerpt from that filing:


Polymer Solutions, Inc. (the “Company”) announced on July 21, 2003 that it had received a letter of intent from an arms length third party relating to the purchase of all of the Company’s outstanding shares.
In light of this unsolicited offer, the Company’s Board of Directors made a decision to actively consider this proposal and to investigate other potential strategic opportunities intended to maximize shareholder value.


PYSU is a California-based company that manufactures paints that emit low levels of volatile organic compounds (VOC). VOC’s have been linked to increasing smog levels. Most of PYSU’s paints are used to coat furniture. Levels of VOC’s that furniture companies can output are limited by law, so using low VOC paints allows them to increase their productivity.

In my judgment, the current Ask price of PYSU is well below the likely acquisition price.

The following excerpts are posted on PYSU’s own web site:


Polymer Solutions’ management has a plan: Aggressively grow the Company to become an attractive acquisition to the multi-national industry giants. Acquisitions are happening now…

“Prices are also ratcheting up. Grow Group sold for 1.4 times sales, Pratt and Lambert for 1.7 times, Thompson Minwax went at a multiple of 1.9, and the offer for Morton is over twice sales." *

*American Paint and Coatings Journal, March 10, 1999: The Coatings Industry, A Look at the Next 10 Years. [LINK]


So, management is clearly supportive of an acquisition, and according to previous sale prices, the price they would expect is 1.4 to 2+ times revenue. At the current Ask price, PYSU is selling for an EV/Revenue of 0.41, less than a third of the lowest price / revenue sale mentioned in the article (see table below to see how I arrived at the 0.41X figure). If the company does sell at 1.4X revenue, the sales price would be $2.02 + $0.11 net cash equals $2.13/share, a 200+% gain which is likely to be realized in a matter of months, assuming the sale is consumated. Since PYSU has been highly profitable the past three years, the company has no debt, and they sell a high-value specialty paint, it is possible that they could command an even higher multiple than 1.4 X revenue.

Assuming all outstanding options will be in the money, there would be total of 10,401,344 shares. Below are the current valuations:

Ask Price $0.70/share
Net Cash $0.11/share
EV $0.59/share
Revenue (3-yr avg.) $1.44/share
EV/Revenue 0.41
FCF (3-yr avg.) $0.08/share
EV/FCF 7.38

Catalyst

Catalyst: An announced unsolicited offer to acquire the company.