JANA Partners Acquires 7.4% of Ashland: Four Scenarios

JANA Partners Acquires 7.4% of Ashland: Four Scenarios

Ashland Inc. (NYSE:ASH) filed an 8-K on April 11th, 2013, stating that Jana Partners LLC, an activist hedge fund, had acquired a 7.4% stake in the company or approximately 5.81mm shares. Per the filing Jana Partners believes Ashland Inc. (NYSE:ASH)’s shares are “undervalued and represent an attractive investment opportunity”. Further, it has had “discussions with the Issuer’s management relating to, among other things, the Issuer’s business, corporate structure, capitalization, operations, strategy and future plans”.

The news follows Jana Partners’ failure to gain two of Agrium Inc. (NYSE:AGU) (TSE:AGU) board seats after a proxy vote on April 9th, 2013. Jana Partners owns a 7.5% stake in Agrium Inc. (NYSE:AGU) (TSE:AGU) and advocated for a split of the company’s wholesale fertilizer and retail businesses.
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Citi believe there are four potential outcomes which could result from Jana Partners’ stake: (1) Nothing occurs. (2) Shareholders rewarded via cash flow. (3) Shareholders rewarded via incremental debt. (4) Shareholders rewarded & debt reduced with proceeds from asset sale(s).

Divestment Candidates

Citi believes that any of the 43% of 2012 EBITDA not generated by ASH Specialty Ingredients segment could be a focal point for Jana, though Consumer Markets (Valvoline) and Water Technologies segments stand out as the most logical divestment candidates. Please see figure 1. & 2. for details.

Consumer Markets (Valvoline, $272mm of 2012 EBITDA):

Valvoline, acquired in 1950, is the #2 U.S. franchised quick-lube chain and the #3 in passenger-car motor oil. ASH reportedly explored the sale of this business back in 2009 (New York Post 4/24/09) for up to $1B (2008 EBITDA of $115mm). Citi believes the business could be worth north of $2B based on 2012 EBITDA of $272mm and multiples ranging from 8-10x. Furthermore, private equity (based on solid cash flow profile) or strategics (looking to move further downstream) would be possible bidders.

Water Technologies ($149mm of 2012 EBITDA):

This business has struggled as a result of its large exposure to the paper end market (58% of 2012 sales). Management recently brought in new leadership to right the ship; however they have also indicated that they could explore a divestiture if the desired improvement didn’t materialize in a timely fashion.

Citi estimates that this segment could be worth north of $1B. Nalco, which was acquired by Ecolab in 2011, has a similar business which generated improved margins in 2012.

A response from ASH management, which is set to report 2Q13 results on April 24th, to Jana Partners’ demands.