Shaun Currie’s write-up of Chemtura Corp (NYSE:CHMT) won him a Benjamin Graham Fellowship.
We will be covering the Value Investing Congress in New York City. Make sure you sign up for our free newsletter to ensure you do not miss coverage!
Chemtura: Executive Summary
- Over the past several years, the management team at Chemtura Corp (NYSE:CHMT) has done a great job of divesting non-core assets, improving its balance sheet, cutting costs, and streamlining its business to become a pure-play on industrial specialty chemicals. Yet, these actions seem to have gone unnoticed as the company still trades at a significant discount to its peers.
- The recent announcement of the sale of its AgroSolutions business will allow the company to both pay off debt, resulting in annual interest expense savings of $13.6MM, and initiate a stock repurchase tender offer for approximately one-third of the outstanding shares. We expect this tender offer to be completed at a 20% premium to the current stock price, which we believe will be finalized by year-end 2014.
- After the tender offer is completed, we expect to company to continue to pursue the sale of the remaining businesses. CEO Craig Rogerson has a history of monetizing companies and has openly (and recently) stated that he could look to pursue this option with Chemtura Corp (NYSE:CHMT). Our sum-of-the-parts analysis supports 40-100% upside from the current stock price.
- Even without a sale of the business or its remaining pieces, we still believe there is attractive upside in the stock. The company has made significant investments in its remaining two industrial businesses, Industrial Performance Products (IPP) and Industrial Engineered Products (IEP), and each have their own specific catalysts upcoming that will drive future growth. We believe that as investors take notice of this growth and the value-creation events the company has recently completed, the company will be valued more in-line with its peers, which would result in 60% upside to the current stock price.
- Recently weak results in the IEP business have been overblown as the company has cut costs and has already seen improvements in this business during 2014. We project this improvement to continue for the rest of the year and into 2015.
Chemtura: Investment Thesis
We believe that Chemtura Corp (NYSE:CHMT) is a misunderstood company whose business today is much different than it was only a few years ago. Once an over-leveraged, broad-based chemicals company, Chemtura has been transforming its business through asset divestitures to improve its balance sheet and become a pure-play on the industrial space. The company’s recent announcement of its divestiture of the AgroSolutions business will enable the company to reach a net-cash position for the first time since returning to the public markets in 2010, and will set up the company to pay down expensive debt and return cash to shareholders. We project that the company will use the proceeds of AgroSolutions transaction, along with excess cash on the balance sheet, to pay down $200MM in debt (which will reduce interest expense by $13.6MM annually) and to initiate a tender offer to repurchase approximately one-third of the current shares outstanding by year-end 2014. We also project that the tender offer will need to be completed at a premium to the current stock price, which will enable investors to see sizeable returns (20%) over the intermediate-term while limiting the downside in the stock.
Additionally, we believe that this is still the early innings of the company’s goal to unlock shareholder value – CEO Craig Rogerson has a history of monetizing companies and has openly stated that the rest of the company or its individual pieces could be sold. Our sum-of the-parts analysis will show that the company is currently valued at a discount to its peers and similar transactions, which supports the idea that additional value-creating transactions could occur. These transactions should result in an additional 40-100% upside (after the tender offer is completed) for shareholders that could be realized over the coming year. Even if these types of events do not come to fruition, the company has been making big investments its two remaining industrial segments which should start to pay off in the coming year, and could result in a re-valuation of the company based solely on its own merits.
See full presentation on Ben Graham Fellowship Finalist: Long Case For Chemtura in PDF format here.