PAH - Platform Acquisition Holdings

[PB]

http://files.shareholder.com/downloads/AMDA-2DC2F1/501187644x0x838824/E2BF470A-7863-43C1-87A8-9FC57A2E9AD9/Alent_Investor_Presentation_July_2015_vF.pdf

 

slide 10

[Liberty]

http://files.shareholder.com/downloads/AMDA-2DC2F1/501187644x0x838824/E2BF470A-7863-43C1-87A8-9FC57A2E9AD9/Alent_Investor_Presentation_July_2015_vF.pdf

 

slide 10

 

So many companies have these distorted graphs. Particularly obvious here on the EBITDA-Capex..

 

$688m almost looks twice as tall as $636m.

[PB]

last share amount I saw was around 208mil but not sure that includes the 483mil equity offering in June + how many shares they are going to have to issue to get Alent deal done.

 

Been in this since March 2014. Knew the gameplay but did not expect them to be in this big of a rush to do it. Figured they would run max leverage but lots of dilution and not exactly paying cheap prices for the acquisitions. Did say they are going to take a break on the call and focus on cleaning everything up now. 

 

Franklin has shown he gets it at Jarden...so why the rush here?

Are the assets that good? Is it because debt is cheap and you have been given this "platform premium" once you have the cf you can always buy back shares down the road?

 

Have heard him answer analyst quarterly model type questions on Jarden calls with - We don't think like that...looking 5+ years not quarters.

 

Anyways...still not sure how many shares outstanding we are looking at.

[cogitator99]

Anyone have thoughts here after the recent decline? PAH is now trading at a price lower than its combined acquisitions...

[ABM]

I assume 244 million fully diluted including the A & B preferreds.  This figure includes a assumption on what the full dilution will be from the A PFs which is based off the value of the common stock over the next 5 years. 

 

Proforma, I see 2016 EBITDA of $930M and FCF of $400M which includes credit for all recent announced acquisitions, 1/3 of synergies, and 5% growth. 

 

At current levels, this implies a 8.5% FCF yield + 5% organic growth (low end of management range) gets me a ~14% IRR not including incremental debt capacity. 

 

Has anyone seen any guidance on the cash tax rate going forward?  I imagine with all the acquisitions the cash tax rate will be low but I have not seen any management discussion on this.   

 

On another note, Franklin is a busy man as he has also set up a SPAC in Europe focused on consolidation in the food staples space called NOMAD Foods. 

 

http://www.nomadfoods.com/~/media/Files/N/Nomad/investor-docs/results-and-presentations/nomad-foods-company-presentation-071415.pdf

[Picasso]

So much for the "platform" value. This stock is well below the total invested capital at this point.

[berkshire101]

How do you value this thing? 

[Guest Grey512]

How do you value this thing?

 

I saw some estimates that PAH will do $400m of FCF in the next 12 months and $650m in the 12 months after that. Stick a 14x multiple on that $650m of FCF (7% FCF/EV yield) which is a premium to the market to account for (i) the Martin Franklin glam factor and (ii) the Daniel Leever factor and how geared his comp package is to PAH's growth, and you get to an EV target of $9b or roughly $5.5b equity value, or roughly $22-23 per share off the diluted share count I got earlier from this thread.

 

At least that's how I think about it. Decent-to-OK'ish risk/reward at the current level.

 

I should add that bulls seem to take what I say above a bit further and claim PAH has additional "option" value stemming from the trust that PAH will make skilful, accretive acquisitions. I tend to be a bit more old-fashioned so cannot comment on whether that's the right approach or not.

[Broeb22]

berkshire 101,

 

Not sure. I've followed their capital structure changes somewhat over the last year, and the degree of movement in the earnings power with the added threat of high leverage makes this more like a blind bet on Franklin's capital allocation abilities and Ackman's judgment.

 

Another concern with PAH is them paying 13x EBITDA for Alent as well as the two divisions of OM Group, especially when OMG looks like it was trading for 7x EBITDA at its 2014 lows. Those are very full multiples even if you give them credit for achieving 100% of their announced synergies.

 

 

[berkshire101]

Thanks guys.  I guess I'm having trouble trusting how they're calculating free cash flow.  It seems to be before taxes.  But yeah, it definitely is a bet on management

[cogitator99]

So much for the "platform" value. This stock is well below the total invested capital at this point.

 

That's precisely what makes it interesting though. Market seems to be pricing that all these deals will be value-destroying, which I somehow doubt will be the case given Franklin's track record.

[Picasso]

Anyone looking at the upcoming APD spin?  Seems like Material Technologies has better EBITDA margins and a little bit smaller than PAH pro-forma for all these acquisitions.  I can't see how PAH would issue stock at the current price to buy the spin but it seems like that would be a no brainer target depending on pricing.

 

Instead of buying PAH I'm going to wait for the spin, buy Material Technologies and just wait for my PAH stock.  Or maybe Ackman will push Material Technologies on PAH which I would not doubt.

[Guest Grey512]

PAH is now down over 50% from its peak this year. Trades at a 10x FY17 FCFF. Whether the original $650m FCFF estimate for that year is still achievable is another question.

 

Any views? Is anyone short or have a bear thesis that you are willing to share? Thanks in advance.

 

 

 

[Jurgis]

Well, how do you value this? You pretty much have to value at P/S basis, since earnings are negative, FCF is nonexistant. Based on OCF (100M in H1), it is not cheap. You can't value on P/B, since book is pretty much goodwill and intangibles. So, the bull valuation can only come from management projections... Or saying that 1 P/S is cheap for this.

 

 

[APG12]

Well, how do you value this? You pretty much have to value at P/S basis, since earnings are negative, FCF is nonexistant.

 

FCF isn't nonexistent, it just takes work to pro-forma the numbers. The acquired assets generate a lot of cash.

[Jurgis]

Well, how do you value this? You pretty much have to value at P/S basis, since earnings are negative, FCF is nonexistant.

 

FCF isn't nonexistent, it just takes work to pro-forma the numbers. The acquired assets generate a lot of cash.

 

It might exist in the future. This year so far it did not.

[APG12]

Well, how do you value this? You pretty much have to value at P/S basis, since earnings are negative, FCF is nonexistant.

 

FCF isn't nonexistent, it just takes work to pro-forma the numbers. The acquired assets generate a lot of cash.

 

It might exist in the future. This year so far it did not.

 

Ok. Let's hope so.

[M77]

Did a quick back of the envelope calculation of the valuation and leverage including the latest announced but not closed transactions. used stock price of 13,5.

 

Net debt

-It seems that net debt will increase from 3,468m to 5,620m when you included Alent and OMG.

-That would imply a net interest cost of about 323m assuming they can get the same terms for the new debt

 

Share count and market cap

-They are paying partly (22%) with shares for Alent - at current prices the new share count would be 246m

-That would imply a market cap of 3,315m and and EV of 8,935m.

 

Valuation

-Since I am reluctant to include synergies before they are realised I just summed up the latest known GAAP/IFRS EBIT of all the companies they have acquired

-I get  a total EBIT of 482m - and and EV/EBIT of 18,5x - not cheap

-If I would take their PF EBITDA-Capex it would imply an EV/(EBITDA-CAPEX) of 12.4x

 

Leverage

-What scares me is the leverage:

net debt / GAAP EBIT 15,5

net debt/ PF EBITDA-capex 7.8

 

GAAP EBIT/interest 1,1

EBITDA-CApex / interest 1,5

 

-If those numbers are not enough PAH has some large maturities coming up in 2020 (2,800m) and 2022 (1,100m) which they need to refinance somehow.

 

 

[muscleman]

Did a quick back of the envelope calculation of the valuation and leverage including the latest announced but not closed transactions. used stock price of 13,5.

 

Net debt

-It seems that net debt will increase from 3,468m to 5,620m when you included Alent and OMG.

-That would imply a net interest cost of about 323m assuming they can get the same terms for the new debt

 

Share count and market cap

-They are paying partly (22%) with shares for Alent - at current prices the new share count would be 246m

-That would imply a market cap of 3,315m and and EV of 8,935m.

 

Valuation

-Since I am reluctant to include synergies before they are realised I just summed up the latest known GAAP/IFRS EBIT of all the companies they have acquired

-I get  a total EBIT of 482m - and and EV/EBIT of 18,5x - not cheap

-If I would take their PF EBITDA-Capex it would imply an EV/(EBITDA-CAPEX) of 12.4x

 

Leverage

-What scares me is the leverage:

net debt / GAAP EBIT 15,5

net debt/ PF EBITDA-capex 7.8

 

GAAP EBIT/interest 1,1

EBITDA-CApex / interest 1,5

 

-If those numbers are not enough PAH has some large maturities coming up in 2020 (2,800m) and 2022 (1,100m) which they need to refinance somehow.

 

EBITDA-CApex / interest 1,5 ratio seems too low to be a safe investment. EBITDA - interest cost $400 m per year before the alent acquisition. If they curtail capex, they could accumulate at most 1.6 bn cash. Then they should be able to pay a large portion of that 2.8bn debt, but not all of it.

 

I looked at it before when it was trading at $20. My rational is that the company started as a blank check with $10 per share. It has to over pay to gain control of a company. Therefore the true value of the company must be way below $10. Then the stock went up to $20-28 and they issued overvalued shares to acquire more companies. This will increase their value per share, but probably goes from way below $10 to around $10 per share. Therefore I would buy at $5, not $20.

Not sure if this view is too naive.  :P

[Guest Grey512]

It's not naive. IMO the rational thing for PAH to do is to back out of the Alent deal using the material adverse change clause if Alent underperforms on their budget numbers. Would have to pay the break-up fee though..

 

 

[Scudbucket]

http://ir.platformspecialtyproducts.com/releasedetail.cfm?ReleaseID=935489

 

 

[cogitator99]

It's not naive. IMO the rational thing for PAH to do is to back out of the Alent deal using the material adverse change clause if Alent underperforms on their budget numbers. Would have to pay the break-up fee though..

 

They won't back out of the deal. Also they argue they have enough cash. Will also be slowing down on acquisitions. Think that's good as they probably have enough on their plate taking all the pieces and integrating them.

 

***

 

Platform has sufficient cash, principally from its $483 million June 2015 equity issuance, to fund the acquisitions of the OM EC and PM Businesses. Consideration for Platform's acquisition of Alent is a mix of stock and cash. The stock portion is a fixed number of shares. As disclosed in the joint announcement, dated July 13, 2015 (the "2.7 Announcement"), issued by Platform and Alent, Platform will issue 18,419,738 shares of its common stock to shareholders of Alent as consideration for the acquisition. This partial share alternative is based on a fixed exchange ratio of 0.31523 based on the VWAP of $24.76 on July 10, 2015. At the time of the announcement, the share alternative was valued at approximately $455 million. For the $1.8 billion cash portion of the purchase price, and as announced in the 2.7 Announcement, Platform has an underwritten commitment for long-term debt financing at what it believes to be competitive market rates. The commitment is for a term loan which is to be pari passu with its existing secured debt. As a result, Platform does not need to issue additional equity to finance the closing of the Alent acquisition.

 

Chief Financial Officer Sanjiv Khattri said, "Despite volatility in the capital markets, Platform has long-term financing and cash on hand to complete the OM Group and Alent transactions. Utilizing the committed financing to pay for the balance of the Alent consideration would result in a leverage ratio of 5.6x - 5.8x net debt to adjusted pro forma EBITDA, based on Platform's revised 2015 adjusted EBITDA guidance, LTM adjusted EBITDA for the OM EC and PM Businesses and Alent, and previously announced synergies1. While this will bring Platform's leverage ratio above our target range of 4.5x net debt to EBITDA, we intend to return to that target range through EBITDA growth and free cash flow generation. We remain committed to the acquisitions of Alent and the OM Group businesses and confident in their strategic rationale and industrial logic."

 

Chairman Martin E. Franklin commented, "The opportunity for Platform to drive earnings growth in 2016 and beyond through execution, end-market growth, and the realization of synergies is the key focus for our management team. We can only achieve our longer term value creation objectives by making the businesses we acquire better. Acquisitions will be a secondary priority while we execute on these important integrations."

[Guest Grey512]

5.8x-6.0x leverage? For a business playing in a relatively cyclical industry, and in a company which has reasonably high fixed costs (i.e. plenty of operational leverage)?

Where is the margin of safety?

 

[muscleman]

5.8x-6.0x leverage? For a business playing in a relatively cyclical industry, and in a company which has reasonably high fixed costs (i.e. plenty of operational leverage)?

Where is the margin of safety?

 

Is specialty chemical a cyclical industry? I am relatively new to this.  :)

[APG12]

5.8x-6.0x leverage? For a business playing in a relatively cyclical industry, and in a company which has reasonably high fixed costs (i.e. plenty of operational leverage)?

Where is the margin of safety?

 

Is specialty chemical a cyclical industry? I am relatively new to this.  :)

 

There are hundreds of specialty chemical companies producing hundreds of kinds of products. I don't think it makes sense to paint them all with the same brush simply because they share the similarity of producing chemicals.