Activist Investor Barington Launches Proxy Fight at Omnova Solutions

Activist investor Barington Capital Group LP on Tuesday revealed it had launched a proxy contest to elect a minority slate of three dissident directors at Omnova Solutions Inc.'s (OMN) eight-person board.

The contest comes only a few days after the dissident investors launched its public campaign at the specialty chemical and decorative laminates company by sending a critical letter urging Omnova's CEO Kevin McMullen to make a divestiture, buy back shares, improve the company's governance and make acquisitions.

Barington, which submitted its nominees to the company late Monday, is seeking to elect the activist fund's founder, Jim Mitarotonda as well as Javier Perez, a former McKinsey & CO. partner with two Chemical engineering degrees. The fund's third nominee is Joseph Gingo, the outgoing CEO of A. Schulman Inc., a supplier of plastic compounds and resin.

Monday was the deadline for submitting nominees for the company's 2015 annual meeting, expected in March or April and The Deal had previously reported that the activist was likely to launch a proxy contest by the deadline.

Barington's letter to McMullen urged the company to retain a financial adviser to consider selling its engineered surfaces division. The unit represents roughly 25% of the company's overall revenue.

A person familiar with the situation said that Barington has been approached by two strategic companies interested in buying all or some of Omnova's engineering surfaces division. He added that a banker has told Barington that a number of strategic businesses are interested in the unit.

A settlement of the proxy campaign is likely — Barington has launched several insurgencies in the past few years all of which were settled. The last proxy contest launched by Barington that wasn't settled took place in 2011 – at water and fuel pipe maker Ameron International Corp. – where the activists succeeded in putting Mitarotonda on the board. Ameron was subsequently sold that same year to National Oilwell-Varco Inc. (NOV), a large U.S. oilfield equipment maker, for $772 million, with Barington's support.

A recent Institutional Shareholder Services report obtained by The Deal noted that the company CEO outstanding equity awards "automatically accelerate upon a change in control," which gained Omnova a negative "red flag" from the proxy advisory firm. In its letter, Barington said it found it "disconcerting" that Omnova's board had authorized the company to pay McMullen "almost $10 million in 'golden parachute payments'" in the event of his involuntary termination and that his equity awards "vest in the event of a change of control," regardless of whether he is terminated.

Barington urged the company to focus on its Performance Chemical division — its other much larger business segment — and make acquisitions that would "enhance it."

In addition, Barington calculated that Omnova has cash on hand as of Aug. 31 of $147 million and said it should raise its share repurchase program.

The activist also raised concerns that Omnova's management, led by its CEO, may be reluctant to sell the engineering surfaces business because it would be "difficult to justify" the company's corporate overhead with the one unit.

In response to the campaign, Omnova issued a statement saying it is "committed to act in the best interest" of the company and shareholders. It added that the company is "taking aggressive" action that includes accelerating investment in its specialty business, which includes product lines in both its performance chemicals and engineering surfaces units. It did not address Barington's concerns about compensation. "We look forward to continuing our dialogue with shareholders as part of our process to help drive sustainable long-term value," McMullen said.

Gingo, one of the Barington nominees, has known the activists for a while. After Mitarotonda got two seats on A. Schulman Inc.'s (SHLM) board in 2005 and 2006, he got Gingo, who had been on the plastic compounds supplier's board since 2000, to serve as its chairman and CEO in 2008. (Gingo is stepping down from leading A. Schulman in January.)

Omnova, based in Fairlawn, Ohio, was founded in 1999, when GenCorp Inc. (GY) spun off its decorative and building products and performance chemicals unit into a separately publicly traded company. GenCorp itself was the target of activist investors in 2004 and 2005 — first by Steel Partners II LP and later by Sandell Asset Management Corp.

Its stock closed at $7.42 Monday giving it a market capitalization of about $366 million.

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