What’s Going On With Platform Specialty Products Corp (PAH)? by Before Losing My Sanity
It’s been a tough year for anything remotely related to commodities or agriculture and Platform Specialty Products is certainly no exception. Since the highs of $28 during 2015 summer the stock is down some 70% (40% YTD), below the IPO price of $10. The PAH story was positioned as one of growth-via-M&A with best-in-class capital allocation/board/management/core shareholders (very sexy), which has turned into delevering, integration and focusing on operations (less sexy). In a blink of an eye PAH acquired six businesses (one just closed this December) for total EV of around $9.3bn compared to the current $6.8bn ($1.7bn equity).
The market punished PAH given the high leverage, recent management changes, guidance misses, exposure to the cyclical challenges of ag and other commodity markets and some issues in governance (dilutive securities etc). In the below I’ll go through briefly the history of PAH and the businesses it acquired (there are plenty of write-ups on this already), address the leverage and see what is on offer at current valuation. The base/bull cases are often cited but I’m more interested in how a downside scenario might look like, how much the equity would be worth, would I get diluted and so on given where we are in the cycle.
My personal view is that agriculture is very interesting as an investment idea (naturally a question of asset and valuation) given the underlying trends of increasing food consumption but declining quality of arable land, which in turn requires “technology” to improve quality and quantity of production. On the specialty chemicals side it is too broad to define. Suggest you talk to any chemicals company’s management and ask them to define “specialty”. You’ll end up with multiples of explanations but most will give the very helpful answer of “anything that’s not commodity”. My point is that given the diversity of products and end markets it is not a sector that one “consolidates” (which investors/analysts often cite regarding PAH) but it certainly doesn’t mean that a company cannot go after certain verticals and acquire market leading companies in them. What makes Platform Specialty Products’ chemicals businesses valuable is that the products they sell represent a small portion of their customers’ costs but hugely important to production.
Platform Specialty Products actually reminds me of the Rockwood story a bit: (a) started out life as a levered company, essentially a public LBO, (b) focused on “speciality chemicals” businesses with #1/#2 positions in their respective markets and built them out by bolt-on acquisitions, (c) highly talented senior leadership whom (d) delevered, dismantled, returned hundreds of millions of dollars to shareholders and eventually sold the company (this chapter is TBC at PAH).
What is Platform Specialty Products?
Platform Specialty Products is the brainchild of Martin Franklin (the genius behind Jarden) and Nicolas Berggruen (the “homeless” billionaire), who founded and floated the company in London during late 2013 and raised nearly $900m in the process.
The idea was to create a business model that is “Asset Lite, High Touch”, i.e. low capex but requiring highly specialised knowledge, R&D and personnel. The goal was that Platform Specialty Products would acquire businesses with EV of $750m-2.5bn, seeking a 10% cash on cash return (levered cash flow/equity) and build them up with the proposition that companies with shareholder-focused capital allocation and value creation processes normally trade at some premium (it’s a fancy way to describe a high quality roll-up). You might disagree but personally I don’t think there is anything wrong with roll-ups provided they are conducted in an ethical and financially prudent manner and there are plenty of examples around of such successful examples (Colfax, Danaher, Liberty etc).
The capital to acquire these businesses came in forms of equity and debt issuance. The below tables provide a summary of all the sources (debt and equity) as well as the uses (acquisitions). In summation, the company raised a total of $4bn via equity (either primary, issued as part of an acquisition and preferreds) and $5.3bn via term loans, bonds or assumed debt. The average share price of the equity raise is approximately $15 (vs the current $7.6) so if you assume that management knew what they were doing at the time of the acquisitions you are buying into PAH at a substantial discount.
Source: Company filings
Platform Specialty Products paid 12x EV/TTM EBITDA on average (10x with synergy projections) for the six businesses, which are OK multiples, however note that for the ag businesses these would have been on 2013/2014 earnings, which will likely be higher than the next 1-2 years. Specialty chemicals businesses tend to carry higher multiples than commodity (through the cycle forward 9-12x on average vs 6-8x commodities) given margins, relatively less cyclicality and stickiness of the products.
The below two slides from a recent investor presentation illustrate the assets Platform Specialty Products has acquired since 2013 and the composition of the portfolio. Up until the recent acquisitions of OMG and Alent late last year the portfolio was very much ag heavy, while now it’s more balanced with 55% of sales coming from the ag business. The two core segments are (i) Performance Solutions (e.g. chemical products used in electronics, packaging, drilling fluids etc) and (ii) Agricultural Solution (e.g. crop protection, animal health related products etc). The first group includes Macdermid, OM Group and the recently closed Alent, while the second contains CAS, Agriphar and Arysta.
Source: Company filings
Including the Alent acquisition that closed last December, the company will have approx. $5.3bn gross debt after tapping its USD and EUR notes recently and net debt of $5bn. The company will also be issuing an additional 18m shares to Alent, taking the share count to around 230m.
Source: Company filings
Below are a few charts showing the performance of the shares as well as the bonds. The stock is down 70% from all-time highs and the bonds (USD and EUR notes) are trading 80-85c on the dollar, while the recently issued senior notes on 95c. The current yield to maturities are in the 10-12% range (mid YTM) vs coupons of 6%, 6.5% and 10.375% (USD notes, EUR notes and senior notes, respectively) with the market implying some level of tension regarding Platform Specialty Products’ credit.
It’s worth addressing the question of solvency here. The net leverage is around $5bn (PF for Alent), which is around 6.4x EBITDA if you factor in the incremental EBITDA and partial synergies (i.e. 2016e), well above the 4.5x through the cycle plans. The company has $5.3bn gross debt with the maturity is illustrated below. The good news is that Platform Specialty Products has no debt coming due until 2020 and no meaningful amortisation thus there is no exposure to refinancing risk. Most