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This piece is not about an investment idea, rather a case study of capital allocation and a story of a few Outsiders. When I first came across Rockwood I thought that this could be summed up neatly in a few paragraphs. Technically speaking it is possible but wouldn’t do justice to the story. The content is rather on the long side, however if you don’t feel like reading the whole thing the below quote, from Rockwood CEO Mr Seifi Ghasemi in early 2014, will give you the essence of what I’m about to describe.

This post is for investors who are (i) interested in stories of shareholder friendly managements and capital allocation, (ii) doing their homework on Air Products and want to learn further about Mr Ghasemi or (iii) doing their homework on Albemarle (eventual acquirer of Rockwood in 2014).

Onto the quote from Mr Ghasemi.

“In the last nine years as a public company we have on a consistent basis said that the only strategic goal we have at Rockwood is to maximize shareholder value. This is the guiding principle, which drives everything we do. Our job is to make money for our shareholders. We believe that in the long-term what matters is the increase in the per share value of our stock and not overall size or growth. 

I want to emphasize this point since it is the core of our strategic thinking; the act to increase the per share value of our stock and are not enamored with building an empire and running a bigger company. So it is this fundamental principle of focusing on increasing the per share value of the stock that led us to this strategic decision to sell 60% – yes, 60% – of our company and focus on our two core businesses. We publicly announced the key elements of our strategy a year-ago in January of 2013 and set the target of executing it in two years. Today, a year later, we have delivered on all elements of that strategy well ahead of plan.”

[drizzle]Rockwood was a specialty chemicals company ran by a great management team and ultimately acquired by Albemarle, returning 18% p.a. since the IPO in 2005 until the announcement of the sale in July 2014. The CEO – Mr Ghasemi - has since went on to transform the Bill Ackman backed Air Products.

Rockwood's history goes all the way back to the 1880s when the founder, Bernard LaPorte (back then known as LaPorte Chemicals) came up with a process to manufacture hydrogen peroxide, which was used for bleaching wool and straw hats, key products of the British economy during the industrial revolution. To conveniently skip 100+ years, LaPorte has fallen on hard times and certain parts of its business were acquired by KKR in 2000 for c. $1.2bn. In 2001 KKR brought in Mr Ghasemi, who has a background in chemicals and industrials and previously worked for GKN and BOC (now part of Linde). Mr Ghasemi, along with CFO Mr Robert Zatta and SVP of Law and Administration Mr Thomas Riordan took this business and over time converted into the largest lithium player in the world, handily enriching shareholders in the process.

Flying under the radar

The reason you probably haven’t heard about the company (unless you follow the lithium business) is partly because it’s a B2B company and partly because promotion was the last thing on management’s mind. Companies like Rockwood can hide in plain sight while compounding away. Management was always very low key but very much aligned with shareholders. Their mantra was decentralised operations and they ran Rockwood out of a small office in Princeton, small staff (25 at IPO, 35 at last count) with everybody on one floor. You could think of Rockwood as a holding company with a bunch of assets and hard-nosed approach for lean operations and value creation.

Comments from Mr Zatta (who previously worked at food giant Campbell Soup) in a 2014 interview paint a clear picture.

“Rockwood, with its small management team, definitely provided that [working in a non-bureaucratic environment]. “We didn’t have any bureaucracy,” Zatta recalls. “We didn’t create levels and layers of management for the sake of having process. We were very much focused on getting things done.”

The business is run on a decentralized basis, with the managers of individual units given the autonomy to run things how they needed to be done. “If they had a big capital project, or if they needed approval to shut something down, they only had to talk to myself and Seifi. And now that he’s not here, basically just myself.”

Rockwood’s leaders were crammed into close quarters. “We had our treasurer sitting in the kitchen. That was his office,” Zatta says. “Our controller sat at a secretary’s desk outside my office. When the CEO came in, the only room he could work out of was a conference room.” Zatta said the nimble management structure was a breath of fresh air compared to his big corporate background. “It was exhilarating,” he says.”

A slide from a 2014 investor meeting gives you an overview of their MO. Having read their filings, conference transcripts and presentations I’ve stopped counting the occurrence of “shareholder value creation” at about 347. At least I got the point.

Rockwood Holdings

Source: company filings

Act I: The beginnings - IPO (2005)

Rockwood started life as a portfolio company of KKR, when the PE fund acquired the pigments, additives, metal processing and other businesses, which constituted over 50% of LaPorte’s (UK chemicals co) sales, for $1.2bn (around 1.2x TTM sales and 8x EBITDA). Apparently, LaPorte’s share price drastically underperformed the FTSE at the time as the business had a bit of a rough patch due to a strong pound, rising oil and other input costs, hence they hoped that selling assets and focusing on their core operations (fine and performance chemicals etc) would help performance. LaPorte was also a bit of a hodgepodge of loosely related assets so selling things off seemed like the right thing to do. In general, the growth profile of chemicals and industrials businesses is modest, but PE firms like these assets given the stability i.e. they can be levered to the hills. In this deal KKR put about $0.3bn equity with the rest financed by debt.

As a side note, what makes a chemicals company a “specialty” business is that the products they sell make up a small percentage of customers’ operations but are critical to performance. These are in general lower volume, higher margin products as compared to their commodity cousins. Rockwood has built a portfolio of inorganic chemicals assets (i.e. no relation to carbon related minerals such as oil) in a diversified way.

Rockwood has grown via acquisitions of which the largest was the 2004 acquisition of Dynamit Nobel. The Dynamit acquisition included the businesses of Sachtleben (TiO2), Chemetall (lithium and surface treatment) and CeramTec (ceramics, hip implants etc) amongst others. Total consideration was $2.3bn (inc. assumed debt) and the seller was MG Technologies (now GEA Group) as the German conglomerate was separating its engineering and chemicals businesses. At the time Dynamit had sales of $1.6bn (compared to Rockwood’s $0.8bn) and EBITDA of c. $300m (paying just above 8x TTM).

With

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