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H.B. Fuller to pay $230 million for Chinese adhesive firm

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ST. PAUL, Minn.—H.B. Fuller Co. has signed an agreement to purchase Tonsan Adhesive Inc., a Chinese developer and manufacturer of engineering adhesives, for about $230 million.

The transaction is subject to customary closing conditions and regulatory approvals. H.B. Fuller said it is expected to close in the fourth quarter of 2014.

The firm said it will acquire 95 percent of Tonsan, and its four founding shareholders will remain with the firm as part of the leadership team, retaining a minority equity interest.

“Tonsan allows us to enter a very important engineering adhesives segment,” said Jim Owens, H.B. Fuller president and CEO. “This is a high-value, high-end chemistry that brings us new technology in that space as well as an important position with a lot of key customers. It dramatically increases the size of our business in China.”

Tonsan operates two manufacturing facilities in China and employs nearly 500. Owens said the employees will be integrated into H.B. Fuller. Nearly all of Tonsan's business is generated within the country.

“Tonsan has a very strong capital infrastructure and ample space for growth in terms of facilities and laboratories,” Owens said. “The investments we're going to make are to strengthen their growth. We're going to invest in people to call on multinational companies and to transfer technology to Tonsan and from Tonsan to the rest of the world.”

H.B. Fuller—a global adhesives provider that focuses on adhesives, sealants and other specialty chemical products—operates three Chinese manufacturing plants and is constructing a fourth projected to be operational sometime in 2015, Owens said.

Engineering adhesives, however, is a new business for H.B. Fuller. Owens said the firm currently has a limited presence in the market, but according to the executive, China represents about 20 percent of the world market, and Tonsan will expand H.B. Fuller's reach drastically.

Engineering adhesives comprise about 30 percent of the global adhesives market, according to H.B. Fuller, and is expected to grow at rates significantly above the average for the adhesives industry. Owens estimated the growth in the high single digit percent range.

“You need a high level of expertise combined with high performance chemistry to meet the needs of customers,” Owens said. “When you meet these challenging demands, you get better pricing and better margins. It's a high performance business, it's a stable and strong business, and it's also a high growth segment of the market.”

H.B. Fuller said Tonsan is the largest independent engineering adhesives provider in China. It offers silicone, epoxy, anaerobic and cyanoacrylate technologies that will facilitate H.B. Fuller's global entry into the segment.

Tonsan serves the transportation—automotive, rail and shipbuilding—market in addition to the machinery, photovoltaic, electronics and electrical industries.

“They're one of the strongest players around the world from a technology standpoint,” Owens said. “They have technology that's been accepted for some of the most demanding applications that exist from an adhesives standpoint.”

Adjusted full-year projections

H.B. Fuller released its financial results for the second quarter ending May 31. Net income dropped about 21 percent to $20.5 million compared to 2013, while net revenue increased 4.8 percent to $544 million.

For the first half of 2014, net income sits at $35.1 million, a drop of 24.5 percent compared to 2013. Net revenue is up 3.1 percent compared to 2013 at $1.03 billion.

The firm has adjusted its full-year earnings per share guidance down from a range of $3 to $3.15 per share to a range of $2.80 to $2.95 per share.

H.B. Fuller cited higher volume and a positive foreign currency translation as positive factors for net revenue increasing in the second quarter.

When the firm released its fiscal year 2013 report, it said it had initiated a multi-year, $60 million project—Project One—to install SAP application software as its global information technology platform. The project is expected to be complete by the end of fiscal year 2016. Its North American adhesives business went live on SAP on April 7 as expected.

H.B. Fuller said the initial go-live for the project disrupted its business process and required a high level of technical support to stabilize. The duration of the disruption and cost of the technical support required was significantly higher than anticipated.

The company said its adjusted second quarter earnings exclude $8.1 million of unplanned and non-recurring costs associated with Project One. In its 2013 fiscal year report, it said it had spent $22 million to date on Project One.

H.B. Fuller said it has been working since March 2012 on a comprehensive business integration project to fully assimilate Forbo Group's industrial adhesives business and to improve the operating performance of its EIMEA operating segment.

It initially estimated the costs associated with the integration to be $125 million but now expects the total project costs to exceed those estimates primarily because of delays in completing the European potion of the activity.

H.B. Fuller expects the project to be substantially complete by the end of the third quarter.