Situational Overview / Investment Thesis:

On March 17, 2014, Quinpario Partners (“Quinpario”), a SPAC, announced the acquisition of Jason Incorporated (“Jason”), a privately held company from its sponsors. Subsequently, on June 30^th, the Company announced the completion of the business combination post the successful shareholder approval. The backdoor entry to the public market deprived Jason the opportunity to market its diversified, well established market leading manufacturing capabilities, long standing customer relationship, and stellar management track record to investors. Additionally, the absence of updated financials for the business combination on financial terminals (i.e., Bloomberg and CapitalIQ, etc) and the lack of sell-side research coverage limited the number of investors that have seriously considered the situation. The combination of the above factors provides an interesting investing opportunity for the savvy investors willing to roll up their sleeves.

Jason is a conglomerate of industrial manufacturing companies and has all the attributes of an excellent company –manufactures essential but non-sexy components; several decades of operating history; operates in a low competitive industry; long-standing customer relationship with repeat business. The Company operates in four different business segments with each segment contributing almost equally to the overall revenues and operating earnings. Jason is a well run company with almost 30 years of operating history that has expanded mainly by pursuing bolt-on acquisitions of small market-leading companies.

Management at both the Jason and Quinpario are highly qualified and offer the right mix of industry experience and restructuring qualifications. Jason’s management team is highly experienced and has historically been focused on achieving operational improvements and strategic bolt-on acquisitions. On the other hand, Quinpario is lead by Jeffry Quinn, who had previously led the successful turnaround of a bankrupt company to transform into a world-class profitable company. With Quinpario overlooking the operations of Jason, the Company can achieve higher organic revenue growth and operational efficiencies.

The Company has multiple avenues to increase revenue and EBITDA margins going forward. Additionally, the Company intends to use cash on hand to pursue strategic acquisitions to bolster their existing business segments. For 2015, I estimate an EBITDA of $100 mm based on improving margins and use of existing cash for growth. Based on my DCF model and average 5-year peer trading multiple, I see an easy upside of 30-35% in the stock price in the next 6-12 months. Comps are currently trading at approx. 10x EBITDA, which while I believe to be overvalued would imply potential for 70% upside. Finally, Jason has approx. 14 mm of warrants outstanding with $12.00 strike price and approx. 5 years to maturity, and so aggressive investors can invest in the warrants as well.

  

Company Background and Industry Dynamics:

Quinpario – The Blank Check Company: Quinpario was formed by Jeffry Quinn and several other senior executives of Solutia Inc (formerly, NYSE: SOA; a global specialty chemical and performance materials company) following the successful sale of Solutia to Eastman Chemical Company (NYSE: EMN) for $4.8 billion in July 2012. Jeffry, then Chairman and CEO of Solutia, had spent almost a decade at the Company and had championed the restructuring of Solutia to transform the bankrupt Company from a small domestic player to a global leading specialty company.

In August 2013, Quinpario issued a $177 mm IPO plus private placement offering to form a blank check company for the purposes of seeking business combinations. Jeffry and his associates are highly experienced in the chemicals and performance materials industries and are the right troop to overlook operations at Jason.

Jason – The Combined Entity: Jason was formed in 1985 when Vince Martin and Mark Train completed the management buyout of three businesses from AMCA. Below is the brief timeline of the Company’s history: 

1985	Company formed by management buyout of three business entities: i)     Osborn Manufacturing (industrial brushes) ii)    Jackson Buff (industrial buff) iii)  Janesville Products (automotive acoustic fiber)
1987	Company went public and got listed on Nasdaq
1991	Acquired Sackner Products to expand motor vehicle product line Acquired Lea Manufacturing to merge with Jackson Buff and form Jackson Lea
1993	Entered into Components business by acquiring Koller Group
1995	Entered into Seating business by acquiring Milsco Manufacturing
2000	Jason was acquired by PE firm Saw Mill Capital and went private
2010	Recapitalized by Falcon Investment Advisor and Hamilton Lane Advisors
2011	Acquired Morton Manufacturing to expand its metal conversion capabilities
2014	Business combination with Quinpario to form Jason Industries

** Complete timeline can be found Here

Jason has primarily expanded through strategic and highly selective acquisitions (38 acquisitions in 29 years) of small market leading manufacturers with strong free cash flows. Jason is a well established industrial conglomerate with a global manufacturing platform encompassing diverse group of industries, regions, and markets. The Company divides its business into four segments i) Seating, ii) Acoustics, iii) Finishing and iv) Components. Combined revenue in 2013 was $680 mm with almost equal contributions from each segment. Jason operates in 11 countries. Approx. 75% and 20% of the revenues are generated from US and Europe, respectively, though ROW is a big area of focus to increase revenues going forward. 

i) Seating Segment: Jason entered into the seating business in 1995 with the acquisition of Milsco Manufacturing. Milsco manufactures seats for motorcycles and other motor equipments for OEM partners. The Company was initially founded in 1924 and has maintained a long standing relationship with Harley Davidson since 1934. Milsco is now the biggest supplier of seats for tractors and other agricultural and construction vehicles producing more than 3 million seats annually. Milsco operates in the less competitive non-auto industry where the contracts are awarded to a sole supplier for a particular platform. Milsco has long standing relationships with customers with average relationship of 31years with top customers. Total revenue and EBITDA for 2013 were $165.2 mm and $25.6 mm (15.5% margin). 

Seating	2011	2012	2013
Sales (mm)	$164.9	$162.5	$165.2
% Growth		-1.5%	1.7%
EBITDA (mm)	$24.4	$22.6	$25.6
EBITDA  Margins	14.8%	13.9%	15.5%

Milsco supplies seats to agricultural and construction vehicles and hence the growth is tied to the overall industrial growth. Jason estimates the addressable market size to be $450 mm in the US and $1.2 bln globally per year. Going forward, Jason intends to grow the segment by expanding internationally and by entering into the bus and rail seating sector.  

a)      International Expansion: Currently, 80% of the revenues are generated in the US, and international expansion provides opportunity for the segment to grow. The seating segment is currently expanding in India by leveraging its existing Finishing segment’s supply chain, human resource, sales force and manufacturing capacity. The business segment has recently been awarded seating supply contract from an international OEM and is in the process of negotiations with several other local vehicle manufacturers to supply seats.

b)      Bus and Rail: Current market size for bus and rail seating is approx. $1 bln per year globally and provides a great opportunity for Milsco to increase revenues.

ii) Finishing: The segment designs and manufactures finishing products such as industrial brushes, buffs, and polishing components. The Company entered into the Finishing business with the acquisition of Osborn and Jackson Buff from AMCA in 1985. Osborn, which is headquartered in Germany, was formed more than a century ago (1889 to be precise). Subsequently, Jason expanded the segment with the acquisition of Lea Manufacturing (1991), Power Brushes (1998), Sealeze (1999), Lipert-Unipol (2006; largest European buff and components manufacturer). End products are supplied to different sectors but sales are directly linked to the global industrial production. Average customer relationship is 21 years with top customers.

Total revenue and EBITDA for 2013 were $180.4 mm and $17.6 mm (9.8% margin). Almost 55% of revenue is generated from Europe (35% from US, and the remaining 10% from ROW) and the weak European economy and the currency fluctuation have been the primary reason for the declining revenues. 

Finishing	2011	2012	2013
Sales (mm)	$190.7	$184.3	$180.4
% Growth		-3.4%	-2.1%
EBITDA (mm)	$14.8	$18.4	$17.6
EBITDA  Margins	7.8%	10.0%	9.8%

The finishing segment has an addressable market of approx. $1 bln; $7 bln if abrasives are considered. Jason is currently a small player in Abrasives but is looking to penetrate in the segment. The market for finishing components is highly fragmented with no real treat from other big players. Jason is currently the #1 provider for industrial brushes in the world and an exclusive supplier for many niche brushes and buffs. 

iii)    Acoustic: Jason entered into the acoustic business with the acquisition of Janesville Products from AMCA in 1985.  Janesville was originally formed approx. 138 years ago and today is one of the largest producers of acoustical fiber insulation and leading producer of automotive fiber-based molded and die-cut products. 

Addressable market for the acoustic segment is approx. $2 bln in the US and $10 bln globally per year. Growth in the market is driven by the need for improved noise and vibration cancellation, improved aesthetics, and lighter weight components in automobiles. Janesville’s products are highly rated in the industry and are used in approximately 70% of light vehicles manufactured in the US, including 13 of 2013’s top 15 models (according to Company filings). Product quality is attested by the number of supplier awards that the Company has won in the last couple of years (most recently was awarded Finalist for 2013 Chrysler Supplier of the Year).

The segment contributes to 30% and 25% of the overall revenues and EBITDA. In 2013 total revenue and EBITDA were $204.5 mm and $23.4 mm (11.4% margin). Revenues are split between US (78%) and Europe (22%). 

Acoustics	2011	2012	2013
Sales (mm)	$145.3	$172.3	$204.5
% Growth		18.6%	18.7%
EBITDA (mm)	$9.1	$13.4	$23.4
EBITDA  Margins	6.3%	7.8%	11.4%

Jason currently operates as Tier-I and Tier-II supplier but is focused on increasing direct OEM sales to increase value-added services that it can offer to the OEMs. Other growth strategy includes broadening the number of vehicle platforms that utilize the products and increasing the number of components per vehicle it offers. 

iv)    Components: The business segment manufacturers stamped, formed, expanded, and perforated components and sub-assemblies that are used in broad range of products including small-gas engines, smart meters, outdoor equipments, hardware and railcars. Jason entered into the component business with the acquisition of Koller Group in 1991 and has subsequently expanded with the acquisition of companies like Assembled Products, Metalex and more recently Morton Manufacturing in 2011. 100% of the revenues are generated within the US and the addressable market is approx. 1.0 bln per year.

The segment contributes to 20% and 26% of the overall revenues and EBITDA. In 2013, total revenue and EBITDA were $130.7 mm and $22.9 mm (17.5% margin).

The acquisition of Morton gave the Company access to the railcars segment, which is currently observing rapid growth due to the replacement of the aging fleet and the expansion of crude-by-rail. Jason has manufacturing facilities in the US and in China providing the Company with access to low cost manufacturing along with superior domestic engineering capabilities.

Components	2011	2012	2013
Sales (mm)	$99.7	$135.9	$130.7
% Growth		36.3%	-3.8%
EBITDA (mm)	$18.6	$25.1	$22.9
EBITDA  Margins	18.7%	18.5%	17.5%

 

Why does Jason Industries Warrant your Attention?

i)        Conglomerate of dominant manufacturing companies with well established products and long standing repeat customers: Jason might not be producing the trend setting products of the world but is certainly producing components that are highly essential for a wide range of end products in different industrial sectors such as Auto, Energy, Power, Agriculture, etc. The combination of manufacturing boring components with market leading position in a non-competitive environment and long standing customer relationship is something special.  

1. Dominant companies in diversified business segments: All of Jason’s business segments (Seating, Acoustic, Finishing, and Components) contribute almost equally to the revenue and EBITDA. Products while generally fall under the industrial umbrella are offered to a wide range of sectors (Automotive, Energy, Power, Agriculture, etc). Below is the revenue and EBITDA contribution from individual business segments 

• Seating – Focused on non-auto sector. While seating for commercial vehicle is highly competitive and populated with the likes of Johnson Control and Lear Corporation, seating for motorbike and agricultural equipments is non-competitive.
• Finishing – Finishing is an essential step involved in manufacturing of most components though from a cost and time standpoint this might be a minor sub process. Market for Finishing components is highly fragmented and Jason commands the segment in technology, variety, and production capabilities.
• Acoustics – Acoustical fiber insulations are not visible components in an automobile and are classified as Tier-I or II components.
• Components – Jason manufactures small components and sub-assemblies that are again not the Tier-I components that go into the main equipment. 

			Avg
Business	Major	Estb'd.	Customer
Segment	Brand	Year	Life
Seating	Milsco	1924	31 Yrs
Acoustics	Janesville	1876	NA
Finishing	Osborn	1889	21 Yrs
Components	Koller	1919	21 Yrs

ii)      Extremely Talented Management Teams of Quinpario and Jason that have Skin in the Game:

Quinpario Partners: After the successful sale of Solutia Inc to Eastman Chemicals in 2012, Jeffry Quinn and several other senior executives from Solutia formed Quinpario Partners with the goal of investing in undervalued companies or companies in need of help to reach full potential. The core Quinpario team and their former role at Solutia:

• Jeffry Quinn - Chairman, President and CEO for Solutia
• Paul Berra – Sr. VP, Legal and Governmental Affairs and General Counsel
• Nadim Qureshi – Sr. VP of Corporate Development-Emerging Markets
• John Srivisal - VP, Transaction Execution

To understand the team’s credentials and what they bring to Jason, it is helpful to understand the team’s success at Solutia: Solutia was formed in 1997 as a spin-off from Monsanto. Soon after the spin-off, the Company went into a series of issues related to its business, underfunded pension plan, litigations surrounding various products, and unsustainable debt structure. In Dec 2003, the Company filed for Chapter 11 reorganization.

Jeffry Quinn had joined Solutia in Jan 2003 as a Senior VP and General Counsel, but soon became the Chief Restructuring Officer when the Company started preparing for bankruptcy, and then went on to be the CEO a few months after the Company filed for bankruptcy. As the CEO, Jeffry soon put the Company on a turnaround track and helped it evolve from a domestic centric commodity chemical producer to one of the world’s leading specialty chemicals firms. In 2011, the Company had revenues and EBITDA of approx. $2.1 bln and $520 mm while cutting its business streams to 3 from 23 and increasing its EBITDA margins from 4% to 25%. 

Jason’s Incumbent Team: The incumbent team at Jason is also very competent. The management team has over 25 years of experience in diversified industrial manufacturing that has built the Company through operational improvements and strategic acquisitions. David Westgate has been the CEO of Jason for 10 years and has been instrumental in laying the Jason Business System (JBS). JBS is a core set of principles and processes established by Mr. Westgate that fosters collaboration among Jason’s diverse business units and reduces working capital. 

Both the teams have substantial skin in the game and have a good motivation for the Company to succeed. 

Insider Participation			Shares (mm)	Ownership %
Jason Rollover Participants*			3.485	15.1%
Quinpario - Private Placement			1.15	5.0%
Founder Shares - Vested**			1.23	5.3%
Total			5.862	20.1%
Shares Used for Ownership Calculation				23.11

* Rollover Participants include: David C. Westgate (Chairman, President and CEO), Stephen L. Cripe (CFO), and other executive and rollover funds - Saw Mill Capital, Falcon Investment Advisors and Hamilton Lane.

** Founders have additional 5mm shares that get vested at various stock prices. Full vesting at $17.00. 

iii)    Undervalued Stock: Jason has multiple levers to increase EBITDA and cash flows in the future. I estimate the Company can easily achieve an EBITDA of $95 - $100 mm in 2015 (versus $80 mm EBITDA in 2013) through the combination of i) new product introduction, ii) margin expansion, iii) geographical expansion, and iv) synergetic bolt-on acquisitions. Jason currently has about $84 mm of cash on its balance sheet and it intends to utilize the current cash balance to acquire new businesses. Assuming Jason buys an asset at 6 - 7x EBITDA, the overall EBITDA for Jason can increase by $12 – 14 mm. Additionally, Jeffry Quinn and the Quinpario team will be focused on improving operational efficiencies and restructuring the inefficient companies at Jason.

Jason’s vision, per its investor presentation dated March 18^th, is to achieve revenue / EBITDA of approx. $700 mm / $92mm by 2015 and $1.0 - $1.5 bln / $150 - $200 mm by 2017 through a significant growth plan that the Company has envisioned to accomplish.

Jason’s comps are currently trading at 10.0x EBITDA, although the average trading multiple for the last 5-years has been about 8.7x. At 8.7x EBITDA, Jason’s implied EV is approx. $870 mm. Calculating implied stock price is complicated as the number of diluted shares outstanding vary for the dilution from the underlying warrants and vested founder shares. If we use a conservative number of 32.5 mm shares (diluted shares at $15.00 stock price), the implied stock price is approx. $13.90 or 30% above current stock price. Alternatively, a simple DCF assuming $100mm of EBITDA for 2015 growing modestly at 5% for the next 5 years and a 7x exit multiple, would imply market cap of $480 mm or stock price of $14.25 (35% upside).

Total Diluted Shares Outstanding				Current Dilution	Full Dilution  at $15.00
IPO Shares Issued				17.25	17.25
Redeemed Shares				-2.54	-2.54
Private Placement Shares				1.15	1.15
Founder Shares				1.23	4.97	*
Warrant - TSM Method ($12.0 strike; 14mm O/S)				0.00	2.80
Rollover Shares - Jason Executives				3.49	3.49
Convertible Preferred				5.43	5.43
Total Diluted Shares				26.00	32.54
* 6.21 mm total shares to be vested at stock price of $17.00

 

Conclusion: The back door entry to the public market did not capture the attention of a lot of investors. Additionally, the lack of visible Company’s financials on financial terminals like CapitalIQ and Bloomberg further reduced the chance of the Company appearing on analyst’s screen. Management expects to start promoting the company in Q4, post completion of its internal business combination. Company is also in talks with some sell-side research analyst (I presume Stifel – financial advisors for Quinpario on the Jason business combination, and Deutstche Bank – credit facility lenders) who I believe might have their initiation reports out in the next quarter. While the lack of marketing has not resulted in a total mispricing of the stock, the additional promotion will surely help the stock attain its full valuation potential. 

Risks:

 i) High Leverage: At net debt of $350 mm, the current leverage of approx. 4.4x 2013 EBITDA. The management has mentioned that is it comfortable with the current leverage situation and so I believe that the Company will deploy any future free cash flows to acquire new businesses versus debt pay down. While the leverage is high, I take comfort from the fact that the debt is not due until the next 5 years. Additionally, I believe that the current debt is mispriced (First Lien Term Loan of $310mm is priced at approx. 5.5% and Second Lien Term Loan is priced at approx. 9.0%). The current cash expense of approx. $27mm ($17.5mm after tax shield) can substantially be reduced if the Company refinances its debt after about a year when the Company has better access to the market. Refinancing the debt to reduce interest expense will help increase the free cash flow to equity holders / amount available for Jason to acquire new businesses.

ii) Macro-economic Downturn: While the business segments are quiet diverse, they are all directly exposed to the global industrial growth in many ways. An economic downturn will surely hit revenues and earnings and the presence of high leverage would have an added impact.

 

- Investor familiarity with the fundamental business