FrontFour Capital Sends Letter to Ferro Corporation

Urges the Board to Pursue Strategic Alternatives to Unlock Shareholder Value

Mar 14, 2016, 08:31 ET from FrontFour Capital Group LLC

GREENWICH, Conn., March 14, 2016 /PRNewswire/ -- FrontFour Capital Group LLC, a significant and long-term shareholder of Ferro Corporation (NYSE: FOE), announced today that it has delivered a letter to the Chairman, President and CEO of Ferro Corporation urging the Board of Directors to pursue strategic alternatives, including a potential sale of the company, in order to unlock shareholder value.

The full text of the letter follows.

March 14, 2016

Mr. Peter T. Thomas Chairman, President and CEO Ferro Corporation 6060 Parkland Boulevard Mayfield Heights, OH 44124

cc: The Board of Directors, Ferro Corporation

Dear Peter,

As you are aware, FrontFour Capital Group LLC ("FrontFour") is a significant and long-term shareholder of Ferro Corp. ("Ferro") with a total ownership stake representing over 3% of Ferro's total shares outstanding.  We initially established our position in late 2012, based on the view that Ferro's shares were materially undervalued after years of mismanagement and poor capital allocation decisions.  In early 2013, we commenced a proxy contest which served as the catalyst for a refresh of Ferro's board of directors ("board"), culminating in your appointment as CEO and a settlement between FrontFour and Ferro.

We write to you and your fellow directors today because similar to 2013, a change in strategic direction is necessary.  We strongly urge the board to unlock shareholder value via the pursuit of strategic alternatives.

Over the past three years under your stewardship Ferro has successfully:

(i)     reduced Ferro's cost structure by over $110 million per year via both cost of goods sold ("COGS") and SG&A reductions;

(ii)    improved gross margins from 26.8% in 2013 to 29.2% in 2015 on a constant currency basis;

(iii)   improved EBITDA margins from 9.8% in 2013 to 14.9% in 2015 on a constant currency basis;

(iv)   improved return on invested capital ("ROIC") from 7.7% in 2013 to 13.7% in 2015;

(v)    exited non-core business including Pharmaceuticals, Solar & Metal Powders, Specialty Plastics and Polymer Additives for approximate gross proceeds of $290 million; and

(vi)   reduced leverage, enabling Ferro to fund and complete four accretive and strategic bolt-on acquisitions for total aggregate consideration of approximately $317.5 million.

Despite the significant operational and financial improvement in Ferro's business since you became CEO, the stock today trades at approximately 7.5x 2016 EV / EBITDA, 11x 2016 EPS and an approximate 10% free cash flow yield from continuing operations when using the midpoint of Ferro's 2016 financial guidance.  These valuation metrics have compressed over the last nine months and are significantly lower than Ferro's five year average.

We believe that Ferro's current valuation is not reflective of:

(i)     the marked improvement is Ferro's margin profile via the disposition of lower margin non-core businesses and transformation into a higher value-add coatings and color solutions player;

(ii)    robust free-cash flow generation as a result of go-forward annual maintenance capital expenditures of approximately 2% of revenues;

(iii)   dynamic M&A pipeline of 50-60 largely private or family-owned bolt-on acquisitions with a minimum ROIC target of 15% inclusive of synergies;

(iv)    Ferro's commitment to returning capital to shareholders via a recently completed $50 million stock buyback program and the authorization of an additional $25 million stock buyback; and

(v)     additional cost reduction opportunities via a facility rationalization and shifting of certain high-cost US based production to lower cost locales as outlined by you during the Company's recent 4Q 2015 earnings conference call.

Over the past year, general market sentiment has shifted significantly due to global growth concerns creating significant volatility within both equity and corporate credit markets.  From 2013 to early 2015, investors rewarded debt-financed acquisition growth, with the acquirer almost always trading up on announcement.  However, more recently investors have become significantly more sensitive to higher leverage and a "short the acquirer" strategy has become pervasive.  Given that Ferro has been positioned as a roll-up story and because approximately 80% of its annual revenue is non-US dollar denominated, the stock has faced headwinds as earnings have been negatively impacted by US dollar strength.  We believe that this has led the market to mistakenly perceive Ferro's base business to be more volatile than it truly is.  With investors now shunning higher leverage ratios and Ferro unable to issue its equity as consideration at an appropriate valuation, the Company is hard pressed to capitalize on its acquisition pipeline.

Due to the aforementioned reasons as well as the poor performance of the Company's stock over the last few years as shown in the chart below, we reiterate our view that the Board should publicly pursue strategic alternatives.


Total Return Overview

12/31/13 - 3/11/16

12/31/14 - 3/11/16

3/11/15 - 3/11/16





Russell 2000




S&P 500




S&P 500 Specialty Chemical Index




Source: Bloomberg


Based on our discussions with numerous Ferro investors, we believe shareholders would be highly supportive of a sale of Ferro at an appropriate valuation.  Given Ferro's significant operational improvement, strong market share positions, robust free cash flow generation and deep acquisition pipeline, we believe that Ferro would receive strong interest from both strategic and private equity buyers, at a price reflecting a significant premium to Ferro's current trading levels.  We would be in support of a transaction at an appropriate premium.

We look forward to further discussions with you and your fellow board members.


/s/  Zachary R. George

/s/  Stephen E. Loukas

Zachary R. George

Portfolio Manager

Stephen E. Loukas

Portfolio Manager

About FrontFour Capital:

FrontFour Capital is an investment adviser with offices in Greenwich, CT and Toronto, ON.  FrontFour focuses on value-oriented investments in North American companies.

Contact: Stephen Loukas FrontFour Capital Group LLC 35 Mason Street, 4th Floor Greenwich, CT 06830 203-274-9050

SOURCE FrontFour Capital Group LLC