PAH - Platform Acquisition Holdings

[giofranchi]

Platform Acquisition Holdings (PAH)

In May, we invested in the Platform Acquisition Holdings IPO. PAH is $850 million market capitalization company that intends to buy an operating business that can serve as an initial platform for future growth and additional acquisitions. Acquisition targets are likely to be businesses that are leaders in their industry, generate strong cash flow, and are run by a high-quality management team.

PAH is led by Martin Franklin, who is currently the Chairman of Jarden, and who was one of our partners in Justice Holdings, the cash shell that merged with Burger King in 2012. At Jarden, Martin has demonstrated an extremely strong track record of capital allocation and operational improvements. Shareholders have been richly rewarded as Jarden's recent stock price has appreciated nearly 30 times since Martin became CEO in 2001. While PAH is a small position for the fund, we believe it offers an attractive risk-reward opportunity.

If PAH achieves our expectations, we believe that we will make multiples of our capital invested. If, however, PAH is unable to acquire a business on attractive terms, we own a near-controlling interest in a pool of cash in a public shell which could be liquidated to return the cash to the Company's owners. A member of our investment team is likely to join the PAH board in the near future. In the meantime, we have observer rights on the board.

 

The way Mr. Ackman describes PAH really intrigues me!

And Mr. Martin Franklin is often praised by Mr. Murray Stahl as a very shrewd capital allocator.

PAH is listed on the London Stock Exchange.

 

giofranchi

Pershing-Square-Q2-Letter1.pdf

[constructive]

http://online.wsj.com/article/BT-CO-20130731-704799.html

 

They spent $24M in their first quarter - quite high! Hopefully they find a suitable acquisition soon.

[cr6196]

This company was a SPAC listed in London, previously Platform Acquisition Holdings. Basically the same as the Justice Holdings vehicle that Martin Franklin, Nicolas Berggruen, and Pershing Square used to acquire a piece of Burger King...no 3G capital this time though.

 

The company they acquired is MacDermid, a speciality chemical company, bought for $1.8bn from private equity and insiders who are both rolling some ownership into the new co. The CEO has been in place since 1990 (was $80m cap when he started, no equity raised!), took over from his father who was there for years before, and there was some kind of PE/MBO deal in the 2000s which took MacDermid out of public hands. The company looks to be very high quality, number 1 or 2 in most of its markets, 25% margins, a lot of FCF with capex usually under 2% of sales, and debt will be 3.5x pro forma EBITDA when everything is done. Martin Franklin is going to be Chairman and the plan seems to be to make some acquisitions (the CEO seems to have done quite a few in the 1990s).

 

They are looking to transfer over to NYSE before the end of the year (I believe they are using the PSP name). Documents are here: http://platformacquisitionholdings.com/infopage.cshtml?

 

 

 

[constructive]

Should be combined with this thread. Still the same ticker but revised company name:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/pah-platform-acquisition-holdings/msg129560/#msg129560

[Phaceliacapital]

Thanks for the idea guys!

[Guest hellsten]

http://brooklyninvestor.blogspot.com/2013/11/platform-specialty-products.html

 

Returns since September 2001:

                                 

JAH:                          +33.5%/year  (total return)

S&P 500 index:          +4.6%/year  (excluding dividends)

Berkshire Hathaway:  +7.8%/year

 

Ackman's interest in investing with Martin Franklin is clearly due to his performance at JAH (that's exactly what he said).

…

 

 

But so far this is very interesting to me as:

Management does seem to be outsider CEO-like and even founder/CEO-like as a substantial portion of his net worth was invested in the company.  The current CEO, Daniel Leever's father ran the business for decades so it's sort of a family business in that sense too.  The annual reports are great.

The high free cash flow generative ability and the fact that this model has been sustained over time is very interesting.

This is not a "a bunch of successful rich guys are involved in this so it should work" kind of investment idea, even though that was the catalyst to make me take a look at this.  I wouldn't invest in this just on the reputation of the backers.  But it is obviously a positive factor.

So this is like a compound option (a call option on a call option?  Don't ask); you have an outsider CEO (Franklin) buying a company run by another outsider CEO (Leever) backed by a very good stock picker (Ackman).

 

http://www.thestreet.com/story/12265903/1/ackman-backed-venture-lists-on-nyse-after-macdermid-deal.html

 

Platform was incorporated in April of 2013 and listed on the London Stock Exchange with the intent to buy companies with an enterprise value of between $750 million and $2.5 billion. The acquisition vehicle found its first deal in a $1.8 billion acquisition of MacDermid, a specialty chemicals manufacturer that had been considering an initial public offering, but instead saw an opportunity to take Franklin & Platform on as a partner.

 

On Thursday, Platform Specialty Products pulled their shares from the London Stock Exchange and listed them on the NYSE under ticker "PAH."

 

Ackman, who was a board member of Justice Holdings and pitched his Burger King deal at investor conferences, won't have any direct ties to Platform. Pershing Square, however, will hold roughly 28% of Platform's outstanding shares, an over $400 million investment, according to Bloomberg data.

[CorpRaider]

http://online.wsj.com/news/articles/SB10001424052702304500404579125831034481654

 

 

Interesting background on Franklin.  His dad was affiliated with Sir James Goldsmith.  I had no idea.

 

One obvious reservation is that I would expect ROE in branded consumer products > chemicals (special or no).

[Cunninghamew]

Nice find...  presentation is helpful if you haven't looked at it

 

http://files.shareholder.com/downloads/AMDA-2DC2F1/2925159882x0x714832/64EB7848-FC6A-4545-8B99-97252A07356B/Project_WHO_Investor_Presentation_vF.pdf

 

Interesting data points

 

1. "Raw materials account for 81% of COGS with no single material representing more than 3% of COGS"

2. "Limited capacity constraints in manufacturing"

3. "Enjoys #1 or #2 market position in most of its businesses"

4. 'Both Dan Leever and Frank Monteiro are rolling 100% of their MacDermaid equity stakes into PSP"

5. Gearing of $755mm 1st lein debt... net debt/adj ebitda of 3.8x

6. Geographically diverse sales...  serves more than 3,500 customers through direct sales force in 24 countries

7. "15 low-cost manufacturing sites and 23 local technical service facilities worldwide"

8. Nice list of end-users in both segments

9. 750 patents and a long history... "global low-cost manufacturing footprint"...  "highly technical post-sale service"... products designed collaboratively to meet specific customer needs/applications... gross margins north of 45% for 20+ years

10. Maintenance CAPEX is tiny: 2012 1.8% of sales or $13mm... 91% of Adj EBTIDA was turned into FCF = $147mm

 

I can't confirm any of that, but the presentation def. says the things you would want to read

[mcliu]

Isn't this quite pricey?

[Cunninghamew]

I don't even know where it trades... just briefly read about the biz after Helsten put the post up.

 

If what I have read is true (capital light / highly cash generative / decent barriers to entry / good returns / good mgmt / plenty of growth opportunities) then I wouldn't be surprised if it trades between a 5-7% FCF yield.

 

$147mm TTM FCF (according to the presentation) leads to value ranging from $2.9 bill to $2.1 bill

[jouni1]

http://www.thestreet.com/story/12265903/3/ackman-backed-venture-lists-on-nyse-after-macdermid-deal.html

 

"Shares in Platform Specialty Products were falling more than 1% to $14.70 in early Friday trading. The company currently carries a market capitalization of about $1.5 billion."

 

don't know how accurate this is but it's all i could find quickly. would mean about 10 times fcf? i'm kind of liking this if that's true, have to dig up something official on share count.

[prevalou]

LTM adjusted EBITDA=180 m$

shares count= 103.7 m+16.2 m warrants at 11.5$

net bebt=690 m$

EV/ebitda=12 times EBITDA, not counting warrants. cheap ?

[jouni1]

does anybody have a grasp on the dilutive effects of the preferred shares and warrants? if i understood this correctly the preferreds are paid dividends in common stock if the stock price is over some limit.

 

if anybody has already figured this out i would appreciate you sharing, thanks a lot in advance!  :-[

[Cunninghamew]

LTM adjusted EBITDA=180 m$

shares count= 103.7 m+16.2 m warrants at 11.5$

net bebt=690 m$

EV/ebitda=12 times EBITDA, not counting warrants. cheap ?

 

No not cheap on an EV/EBITDA basis ... the link to the Brookyn Investor article has some dated comps for specialty chem. He pegs the group trading at about 10x EV/EBITDA, but notes that the less capital intensive and high margin spec chems trade higher (see Albermarle 12.2x and FMC Corp 11.2x). To be frank, I am not a huge fan of comp valuations, because they just tell you where the group is at a point in time rather than where they should be.

 

It will be interesting to watch this biz over a few quarters and see if it is of really high caliber.

 

The founder prefs are also dilutive... it looks like they set up a 20% performance fee for the existing mgmt that is subject to a high-water market. Very similar to a hedge fund performance fee. I think I am reading this right, but for every pref. the holder can get shares equal to 20% of the stock price increase above a set price. So if the stock goes to $20 in 2014 the pref holders will get ($20-$10)*.2 or $2 in PAH stock for each pref they hold. Then in 2015 the base price (which was $10 in 2014) will be set higher to whatever it closed at.

[jouni1]

actually it seems to be rise in share price * number of common stock. so they get 20% of all the gains. seems unreasonable to me. might have to cross this off the list.

[Cunninghamew]

"Beginning in 2014, if the average stock price of our ordinary shares exceeds $11.50 per share for the last ten (10) days of the calendar year, the holders of Founder Preferred Shares will receive a dividend in the form of Platform ordinary shares equal to 20% of the appreciation of the market price of Platform ordinary shares issued to holders of Platform ordinary shares in the initial public offering. In the first year, if a dividend is payable, the dividend amount will be calculated at the end  of each calendar year based on the appreciated stock price as determined above (the “Dividend Price”) compared to the initial public offering price of $10.00 per Platform ordinary share. In subsequent years, the dividend amount will be calculated based on the appreciated stock price compared to the highest Dividend Price previously used in calculating the Founder Preferred Share dividends. Dividends are paid for the term the Founder Preferred Shares are outstanding. The life of the preferred can be extended up to 3 years at the request of the Founder Entities and with the consent of the Board. Each Founder Preferred Share is convertible into one Platform ordinary share at the option of the holder and has certain voting rights"

[jouni1]

Series A Preferred Stock . Prior to the Domestication, Platform had 2,000,000 Founder Preferred Shares outstanding. In connection with

the Domestication, each Founder Preferred Share will be converted into one share of Series A Preferred Stock of Platform Delaware. The special

rights, preferences and privileges of the Series A Preferred Stock are set forth in the form of the new certificate of incorporation attached to this

prospectus.

Dividends . Subject to applicable law and the rights, if any, of any series of preferred stock of Platform Delaware ranking senior to the

Series A Preferred Stock as to dividends, at any time subsequent to the consummation of the MacDermid Holdings Acquisition, if the average

closing price per share of common stock is $11.50 (subject to adjustment in accordance with the certificate of incorporation) or more for ten

consecutive trading days, the holders of the Series A Preferred Stock will be entitled to receive, in respect of each calendar year (or period

commencing on November 1, 2013 and ending on December 31, 2013) (each a “Dividend Year”), a cumulative annual dividend amount (the

“Annual Dividend Amount”), which is calculated as follows:

A X B, where:

A = an amount equal to 20% of the increase (if any) in the value of a share of Platform Delaware common stock, such increase calculated

as being the difference between (i) the Average Price (as defined in the Platform Delaware certificate of incorporation) per share of Platform

Delaware common stock or Platform ordinary shares, as the case may be, over the last ten days of the relevant calendar year for such annual

dividend (the “Dividend Price”) and (ii) (x) if no Annual Dividend Amount has previously been paid, a price of $10.00 per share of Platform

Delaware common stock, or (y) if an Annual Dividend Amount has previously been paid, the highest Dividend Price for any prior Dividend

Year (provided in each case such amount is subject to such adjustment either as the Board of Directors in its absolute discretion determine to be

fair and reasonable in the event of a subdivision, combination or similar reclassification or recapitalization of the outstanding Platform Delaware

common stock or otherwise as determined in accordance with the certificate of incorporation, in each case without a corresponding subdivision,

combination or similar reclassification or recapitalization of the outstanding shares of Series A Preferred Stock); and

B = a number of shares of Platform Delaware common stock equal to such number of shares of Platform ordinary shares as was in issue on

May 17, 2013 plus the number of Platform ordinary shares issuable upon automatic conversion of the Founder Preferred Shares in accordance

with the Platform BVI Articles (as defined below) of Platform BVI as if converted on May 17, 2013, which such amount is subject to such

adjustment either as the Board of Directors in its absolute discretion determine to be fair and reasonable in the event of a subdivision,

combination or similar reclassification or recapitalization of the outstanding Platform Delaware common stock or otherwise as determined in

accordance with the certificate of incorporation, in each case without a corresponding subdivision, combination or similar reclassification or

recapitalization of the outstanding shares of Series A Preferred Stock.

Each Annual Dividend Amount shall be divided between the holders pro rata to the number of Series A Preferred Stock held by them on

the relevant Dividend Date (as defined in the Platform Delaware certificate of incorporation). The Annual Dividend Amount will be paid no later

than ten trading days from the Dividend Date by the issue to each holder of Series A Preferred Stock of such number of shares of common stock

as is equal to the pro rata amount of the Annual Dividend Amount to which they are entitled divided by the average closing price per share of

Platform Delaware common stock on the relevant Dividend Date.

 

 

thats from the S4. it just seems so stupid i must be reading it wrong. what do you think?

[Cunninghamew]

So your post raised a new question for me, but I still think I am reading the first part right

 

The dividend is equal to A*B, where A=20%*increase in value and B=# of shares

 

Regarding A - I am still reading it as an increase in price over $10 in the first year. So if the stock hits $20 they will get $20-$10 = $10*20% = $2 in shares. Furthermore, the next years dividend price would be set off of $20 in this example. I.e. for them to get another $2 in dividends the stock would have to increase to $30 ($30-$20)= $10*20% = $2.  Like I said early, it looks like a performance fee with a  high water mark to me.

 

Regarding B - this section confused me... I originally thought the # of shares was equal to the amount of founder preferred outstanding, but it looks like it is equal to preferreds outstanding + common

 

All in all it sucks under either interpretation.  It is an interesting way to keep old mgmt incentivized, but it is also a policy that is good for mgmt not for shareholders.

 

My interpretation might be wrong, so apologizes a head of time if I am missing something. Did you see anything about how long these last?

[PhatKing]

My understanding of the 2,000,000 PAH “Founders preferred shares” is as follows. I am a holder of PAH shares, and please do you own homework before transacting in PAH  shares.

 

1) The founder shares are owned only by Nicholas Brueggen (940,000 shares) and Martin Franklin (1,060,000 shares).

 

2) They expire in 7 years, (on Oct 2020 or December 2020, I am not sure), but can be extended by the independent Directors for another 3 years in 2020.

 

3) They get dividends of 20% of the increase in share price in each year, on the 90,529,500 shares that were outstanding on May 2013 (88,529,500 common shares plus the 2,000,000 founder shares). Subsequent

issued after May 2013, are NOT included in the “founder shares dividend calculation”. So essentially they get $18,105,800 ($90,529,500 x 20%) in common shares for each $1 in PAH share price appreciation.  For example, at today price of approx $14.00, the PAH share price has appreciated by $4.00 since the launch of the company (May 2013 at $10/share). So they are entitled to a dividend of $72,423,600 in new common shares, or about 5.2 million shares, if they were issued at today’s price of $14.00. That means approx 5% dilution has already occurred

 

4) This $18,105,800 per $1 common stock price appreciation is paid out at the end of the calendar year, and so they have already received the dividend for calendar 2013. Perhaps that is why the current share count is about 103.5 million shares.

 

So one way to look at this is that this is like a hedge fund fee, as others have stated on this board. Assuming about 103.5 million shares,  if the common share price rises by $1, then the EV rises by $103.5 million, and the founders get $18.1 million in shares. So really they have a 17.5% fee ($18.1/ $103.5) on the share price appreciation. As the number of shares increase, due to executive options and restricted stock issuance, then their founder fee ”percentage” seem to get lower. So if the share count is say 120 million, then their fee remains at $18.1 million, and their fee % declines to 15%.

 

Is this onerous? Current Institutional holders seem sanguine about it – including Pershing Square, who holds 30% of the shares outstanding, and has no founder shares. Is it cheap? That depends on your time horizon, and the quality of the companies that are added to the PAH Chemical Specialty portfolio of companies. It is a bet the management at BOD will add companies with superior business characteristics - moats, high ROE, good management etc. to their portfolio. This is a bet on the jockeys and investors associated with the companies, including Martin Franklin, Dan Leever, Ackman, Brueggen etc.  I suppose the hedge fund-like fee is the price of playing with the founders.

 

[giofranchi]

Blue Ridge Capital Discloses Platform Specialty Products Position

 

http://www.marketfolly.com/2014/02/blue-ridge-capital-discloses-platform.html

 

 

Gio

[giofranchi]

Thinking about PAH, and this holds true for any investment of mine, the following words by Mr. Charles Munger never leave my mind:

Over the long term, it’s hard for a stock to earn a much better return than the business, which it underlies, earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much different than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.

 

Gio

 

[Guest hellsten]

Thinking about PAH, and this holds true for any investment of mine, the following words by Mr. Charles Munger never leave my mind:

Over the long term, it’s hard for a stock to earn a much better return than the business, which it underlies, earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much different than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.

 

Gio

 

Thanks. Great quote.

 

From Brooklyn Investor's article:

First of all, we notice that ROE is pretty decent averaging 21% throughout the period.  But again, the period up to 2000 is clearly much higher than post 2000.  The OI / avg total cap figure is my proxy for return on capital; it's operating income divided by average shareholders equity plus long term debt.  It's a pretax figure, and it shows decent returns.

 

…so according to him/her, for the period 1994-2006, ROE was ~21.13% and ROC ~19.68%.

 

GARP. GARP. GARP.

[CorpRaider]

Hmm.  Isn't DD spinning its specialty chemicals business?  Will have to watch that to see if it is a good comp.

[rogermunibond]

DD is spinning off TiO2 and refrigerants. That's performance chemicals but really somewhat commoditized.

 

I'm no chemical engineer but I think the Macdiarmid businesses are more like some if the lines that Lubrizol is in. Hydraulic fluids, photopolymers, industrial coatings, etc.

[valuestudent]

I don't even know where it trades... just briefly read about the biz after Helsten put the post up.

 

If what I have read is true (capital light / highly cash generative / decent barriers to entry / good returns / good mgmt / plenty of growth opportunities) then I wouldn't be surprised if it trades between a 5-7% FCF yield.

 

$147mm TTM FCF (according to the presentation) leads to value ranging from $2.9 bill to $2.1 bill

 

Does anyone have an issue with how they are calculating FCF? For example adding back taxes and interest expense?? Thoughts?