PLATFORM SPECIALTY PRODUCTS PAH S
November 23, 2016 - 2:01pm EST by
chris815
2016 2017
Price: 8.79 EPS 0 0
Shares Out. (in M): 301 P/E NA 0
Market Cap (in $M): 2,647 P/FCF 33.3 0
Net Debt (in $M): 5,023 EBIT 240 0
TEV ($): 7,670 TEV/EBIT 32 0
Borrow Cost: Available 0-15% cost

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  • Chemicals

Description

We recommend shorting the shares of Platform Specialty Products Corp. (PAH). Our short thesis rests on the obvious factors (at $ 8.79 / share, PAH is trading at 11.8x trailing EBITDA, its balance sheet remains significantly levered in relation to its fixed obligations) and less obvious factors (its strategy is ill conceived, its management is less than forthright with investors).  

 

Martin Franklin founded PAH on 4/23/2013 with the objective to acquire companies with an enterprise value of between $750 million and $2.5 billion.  PAH went public on 5/22/2013, selling  $881 million of shares. Since inception, PAH has acquired six chemical businesses at a cost of $9 billion; the businesses are categorized into two segments: Performance Solutions (plating chemicals) and Agricultural Solutions (agricultural chemicals). The company’s philosophy is to acquire “Asset-Lite, High-Touch” specialty chemical businesses, i.e., favoring employee intensity over capital intensity. The following table summarizes PAH’s current capital structure and valuation:

 

(millions except share price)

 

 

Convertible securities

Common shares outstanding, 11/1/2016

278.470

 
 

Shares issuable, Series A conversion

2.000

 

2.000

Shares issued on new agreement Series B conversion by 12/15/16

5.500

 

5.500

Shares issuable on erceise of PDH exchange rights

8.062

 
 

RSU granted during the 9 ME 9/30/2016

1.792

0.6%

 

Equity based RSU's outstanding, 9/30/2016

2.114

0.8%

 

Stock options, 2013 Plan,  9/30/2016

0.373

0.1%

 

RSUs  outstanding, 2013 Plan, 9/30/2016

2.824

1.0%

 

diluted share count

301.135

 
 

Share price, 11/22/2016

8.79

 
 

Market capitalization

2,646.979

 
 

Cash, 12/31/2015

715.000

 
 

Cash payment to Premira, due by 12/15/16)

460.000

 

  

Operating lease obligations, 930/2016

111.200

 
 

Debt, 12/31/2015

5,278.300

 
 

Enterprise value, net

6,861.479

 
 
 

PAH’s share count (as of 11/1/2016) includes 48.8 million shares sold to the public (21% dilution) on 9/21/2016 for $8.25. The market capitalization calculation in the table above includes 5.5 million common shares issuable to Premira Advisers LLC, the private equity firm from which PAH acquired Arysta on 2/13/2015.  In accordance with an agreement struck with Premira on 9/9/2016, PAH will issue these shares to Premira before 12/15/2016. (more on this below, but note that in addition to issueing 5.5 million common shares, PAH will pay Premira $460 million cash by 12/15/2016).  

 
The following table summarizes the six acquisitions which comprise PAH.
 

PAH’s Businesses

 

(millions)

Alent

OMG + OMG Malaysia

Arysta

CAS

Agriphar

MacDermid

Totals

Acquisition date

12/01/15

10/28/15

02/13/15

11/03/14

10/01/14

10/31/13

 

Cash paid

1,507.0

237.8

2,856.2

984.0

350.2

 

 

Note receivable settlement

 

125.0

 
 
 
 

 

Equity instruments

231.4

 

645.9

52.0

16.6

 

 

Derivative liability

 
 
 
 

3.5

 

 

Acquisition transaction costs

21.1

7.0

30.2

23.6

3.2

41.4

 

total acquisition cost

1,759.5

369.8

3,532.3

1,059.6

373.5

1,900.0

8,994.7

 
 
 
 
 
 
 
 

Earnings (GAAP)

64.0

22.1

(98.0)

22.1

19.0

(47.0)

(0.9)

EBIT

100.0

34.0

79.0

34.0

29.0

9.0

320.0

EBITDA

112.0

48.0

148.0

54.0

35.0

63.0

460.0

Net tangible assets

(115.1)

45.7

1,704.6

255.0

201.0

(518.4)

1,572.8

 
 
 
 
 
 
 

 

Acquisition price / earnings

27.5

16.7

NA

47.9

19.7

NA

NA

Acquisition price / EBIT

17.6

10.9

44.7

31.2

12.9

211.1

31.6

Acquisition price / EBITDA

15.7

7.7

23.9

19.6

10.7

30.2

19.6

Acquisition price / tan. BV

NA

8.1

2.1

4.2

1.9

NA

5.7

 

PAH spent $9 billion acquiring these six businesses since 10/31/2013; with a current enterprise value of $6.7 billion, perhaps PAH represents a bargain? We don’t think so. The earnings and EBIT and EBITDA data in the above table are constructed from the historical performance of each business immediately prior to its acquisition by PAH.  Where possible, we averaged the prior three years of performance.  By this methodology, PAH paid an average of 32x trailing EBIT, 20x trailing EBITDA and just shy of 6x tangible book value for these businesses. As value investors, these valuations strike us as very rich.  Furthermore, these valuations are considerably higher than the valuations PAH touts because they make numerous adjustments to their EBITDA calculations.  We make two inferences:

 
  1. PAH paid very high prices for its collection of businesses (20x trailing EBITDA) – little wonder that PAH’s enterprise value is 25% below the combined cost of these acquisitions.

 
  1. PAH management is less than clear in its disclosure of the prices it paid for its six businesses.

 

One interesting point that corroborates the second inference is PAH’s explanation of the CAS acquisition.  CAS stands for Chemtura AgroSolutions which is owned by Chemtura (CHMT on the NYSE).  While PAH characterizes CAS as an acquisition of a chemical business, what PAH actually purchased for $1.06 billion was four years of distribution rights for Chemtura’s AgroSolutions business.  To be clear, PAH did not purchase the plant and facilities to make the business’s products (they did buy current assets and liabilities).  To make matters worse, on 11/3/2018, their contract with Chemtura expires (Chemtura 2015 10-K, p. 65).  Chemtura characterizes their contract with PAH as “at cost” and recognized $35 million of EBITDA in this segment during 2015 from selling chemicals to PAH. Chemtura management estimates that their contract with PAH is $230 million below market ($57.5 million per year over four years). Two more inferences come to mind:

 
  1. The historical EBITDA for the CAS business must be adjusted for the portion of EBITDA retained by Chemtura; we use Chemtura’s 2015 EBIT ($35 million) from this segment as a proxy for this adjustment. This depresses the EBIT (by $35 million annually) that PAH is likely to make from this business.

 
  1. After 11/3/2018, PAH will need to pay a market rate for the chemicals sold by this part of their business.  Assuming Chemtura’s estimate of the contract economics are about right, PAH’s EBIT will decline by about $57.5 million per year when the below market contracts roll-off in 2018.

 

We don’t think the market understands that PAH’s acquisition of CAS could be more accurately characterized as a four-year distribution agreement than it as an acquisition of a business. More importantly than what we think, let’s take a look at what a sophisticated chemical industry investor, with intimate knowledge of a large portion of PAH’s business, thinks about PAH.  

 

The sophisticated investor we have in mind is Premira Advisers, a large European based private equity firm.  Premira acquired Arysta Life Sciences, a Japanese agricultural chemical company (insecticides, fungicides and herbicides), for $2.4 billion in March 2008.  After owning the business for six years and 11 months, Premira sold it to PAH for $3.5 billion. As part of the Arysta acquisition, PAH issued $600 million of preferred shares (Series B) to Premira Advisors.  These shares were convertible, at the discretion of Premira, into PAH common shares at $27.14 per share.  In the event that Premira elected not to convert the shares by 4/20/2017, PAH was obligated to make Premira whole for the difference between the converted value of the shares and $600 million. On 9/9/2016, PAH and Premira reached an agreement which accelerated the term of this deal from 4/20/2017 to 12/15/2016 in exchange for a $93 million reduction in the value. The following table summarizes the original deal and the re-negotiated deal:

 

Series B Convertible Preferred Share Extinguishment Terms

(millions)

Original deal w/ Premira

9/9/2016 Settlement w/ Premira

PAH common shares issued upon Series B preferred conversion

22.1

5.5

 
 
 

Current market value of common shares to be issued upon Series B conversion

187.3

46.6

Make whole cash payment, originally due 4/20/2017, now due 12/15/2016

412.7

460.0

Total value

600.0

506.6

 

The essence of the renegotiated deal is that Premira reduced the settlement costs from $600 million to $507 million (15.5%) in exchange for accelerating the settlement by four months and increasing the ratio of cash /  PAH common shares received as part of the settlement. One may infer that the Premira partners responsible for the sale of the Arysta business to PAH are not especially confident in PAH’s prospects.  In fairness, it should be noted that PAH issued 48.8 million common shares a week after renegotiating the deal with Premira – perhaps the Premira partners are sleeping easier regarding their upcoming December 2016 payment (if not feeling a bit burned on the timing of PAH’s share offering).  

 

What may have lead the Premira partners to accept the $93 million hair cut?  Note that a substantial portion of PAH’s revenue is from developing markets (exactly how much is not disclosed).  Here is what PAH had to say about this in their 2015 10-K:

 

Our consolidated financial statements are reported in U.S. Dollars while a significant proportion of our assets, liabilities and earnings are denominated in non-U.S. Dollar currencies. As a result, we are exposed to foreign currency exchange rate fluctuations from translating certain of our foreign subsidiaries’ financial statements. (PAH 10-K, 3/11/2016, PDF p. 29).

 

At the time of the Arysta acquisition, 65% of Arysta’s revenue came from Latin America, Africa, Eastern Europe, China, and South Asia. Yet 80% of PAH’s considerable debt load is denominated in dollars (the balance in euros).  This leaves PAH vulnerable in the event the dollar appreciates substantially against the currencies of the countries in which it transacts business.  The following table summarizes PAH’s current debt structure:

 

PAH Debt Structure

 
 
 

Balance

Annual

(millions)

Interest rate

9/30/16

interest cost

Sr. Notes due 2022

6.500%

1,082.5

 

EUR Sr. Notes due 2023

6.000%

387.6

 

Sr. Notes due 2021

10.375%

488.5

 

First lien credit facility, US$, due 2023

5.000%

2,620.0

modified 10/17/16

First lien credit facility, EUR, due 2023

4.750%

638.0

modified 10/17/17

Borrowings under credit lines

3.520%

42.8

 

Other

6.024%

18.9

 

totals

6.990%

5,278.3

369.0

 

Note that PAH’s annual interest costs run about $369 million.  When combined with minimum principal payments and operating lease payments, PAH has financial obligations north of $400 million per year.  The following table summarizes PAH’s financial obligations through 2021:

 

PAH Financial Obligations

 

(millions)

Min. Principal Payments

Min. Operating lease payments

Interest cost

Total fixed charges

Q4 2016

8.9

10.2

369.0

 

2017

34.9

26.0

369.0

429.9

2018

34.8

17.7

369.0

421.5

2019

34.6

12.0

369.0

415.6

2020

3,218.8

9.8

369.0

3,597.6

2021

500.7

8.7

369.0

878.4

Thereafter

1,494.4

26.8

369.0

1,890.2

 

5,327.1

111.2

2,582.7

 

 

While PAH management often refers to adjusted EBITDA figures that are well in excess of $400 million, if we strip-out one-time gains made during the 9 ME 9/30/2016 (e.g., the gain from the renegotiated Series B settlement with Premira Advisers), PAH produced $435 million of EBITDA during the first three quarters of 2016. A continued downturn in the agricultural chemicals market and/or a downturn in the plating chemicals market coupled with further appreciation of the dollar could result in PAH producing less real (i.e., none-adjusted) EBITDA than its financial obligations.  And while management describes its business as “Asset-Lite, High-Touch,” it spends $30 - $40 million of capex annually just to stay in business. Also, its below market distribution deal with Chemtura ends in 24 months, which will depress EBITDA by about $57 million annually. We conclude that, even allowing for the recent equity infusion, PAH is not exactly a well-capitalized business.

 

Finally, to the extent PAH is truly “Asset-Lite, High Touch,” the company is more dependent on its employees than a typical specialty chemical business – i.e., its employees are its most important asset.  While this sounds good in theory, in practice, it is not the best fit for a company organized  by a financial engineer with no background in the specialty chemical industry.  Not surprisingly, anecdotal data suggests there are employee satisfaction problems at PAH.  The following table is comprised of the comments posted by PAH employees to Glassdoor.com, a website which tracks employee satisfaction at companies.

 

PAH Employee Comments Posted to Glassdoor.com

 

Date

Positive Comments

Negative Comments

Advice to management

Rating (5=best)

09/15/16

If you thrive on change and chaos, this place is for you! Opportunity to help build something great, if it can be saved!

High stress, long hours. The most awful benefits I have EVER seen. Leadership can't make up its mind, very high attention deficit.

Focus on talent, and take care of your people. Employee retention will be paramount while the organization figures itself out. Continue implementing a solid framework for the businesses to operate in.

1

06/14/16

I cannot think of any

Poor leadership, disjointed company, it feels like senior leadership is rough out of college, no culture, they do not invest in their employees.

Leadership training, change management.

1

04/04/16

Outstanding products and customers but this is a painful mash-up of recently bought-out companies.

Ongoing loss of senior managers. Well over half of the acquired company leadership has left since the buy-outs commenced 18 months ago. This has been unplanned and therefore unexpected. Communication from the new ownership has been lacking. Our locations are disrespected with juvenile name-calling. We ran lean. No fancy buildings, but this is not a justification for calling our site a ghetto. If they didn't want our people or our facilities, then why did they buy us?

The new owners have demoralized us. We are suffering and distracted. The customers are not of primary concern anymore, rather we are told to deliver on "synergies" first. Our IT and accounting systems are broken yet our top leaders fly in the biggest and best private jets. And they won't come to our locations because they do not appeal to them (recall the ghetto remarks). Our share price has gone from $28 to as low as $5 in less than a year from being bought out. Travel to each and every site and let us know what you are going to do to recover what you have destroyed thus far.

1

03/16/16

Great people, very nice, friendly.

Long hours, demanding. Work week averages 65 to 70 hours / pay tends to be lower than market given the hours expected.

 

1

02/15/16

Great benefits & working environment.

The company is changing and expanding rapidly

 

4

 
 

Given the hurly-burly acquisition activity at PAH, it is not surprising that employee satisfaction is low.  In a business with very high barriers that doesn’t rely on “high-touch,” such comments could be dismissed as growing pains.  However, in a business that relies on high-touch, employee dissatisfaction is a recipe for disaster.  Accordingly, we recommend shorting this particular disaster.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

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    Description

    We recommend shorting the shares of Platform Specialty Products Corp. (PAH). Our short thesis rests on the obvious factors (at $ 8.79 / share, PAH is trading at 11.8x trailing EBITDA, its balance sheet remains significantly levered in relation to its fixed obligations) and less obvious factors (its strategy is ill conceived, its management is less than forthright with investors).  

     

    Martin Franklin founded PAH on 4/23/2013 with the objective to acquire companies with an enterprise value of between $750 million and $2.5 billion.  PAH went public on 5/22/2013, selling  $881 million of shares. Since inception, PAH has acquired six chemical businesses at a cost of $9 billion; the businesses are categorized into two segments: Performance Solutions (plating chemicals) and Agricultural Solutions (agricultural chemicals). The company’s philosophy is to acquire “Asset-Lite, High-Touch” specialty chemical businesses, i.e., favoring employee intensity over capital intensity. The following table summarizes PAH’s current capital structure and valuation:

     

    (millions except share price)

     

     

    Convertible securities

    Common shares outstanding, 11/1/2016

    278.470

     
     

    Shares issuable, Series A conversion

    2.000

     

    2.000

    Shares issued on new agreement Series B conversion by 12/15/16

    5.500

     

    5.500

    Shares issuable on erceise of PDH exchange rights

    8.062

     
     

    RSU granted during the 9 ME 9/30/2016

    1.792

    0.6%

     

    Equity based RSU's outstanding, 9/30/2016

    2.114

    0.8%

     

    Stock options, 2013 Plan,  9/30/2016

    0.373

    0.1%

     

    RSUs  outstanding, 2013 Plan, 9/30/2016

    2.824

    1.0%

     

    diluted share count

    301.135

     
     

    Share price, 11/22/2016

    8.79

     
     

    Market capitalization

    2,646.979

     
     

    Cash, 12/31/2015

    715.000

     
     

    Cash payment to Premira, due by 12/15/16)

    460.000

     

      

    Operating lease obligations, 930/2016

    111.200

     
     

    Debt, 12/31/2015

    5,278.300

     
     

    Enterprise value, net

    6,861.479

     
     
     

    PAH’s share count (as of 11/1/2016) includes 48.8 million shares sold to the public (21% dilution) on 9/21/2016 for $8.25. The market capitalization calculation in the table above includes 5.5 million common shares issuable to Premira Advisers LLC, the private equity firm from which PAH acquired Arysta on 2/13/2015.  In accordance with an agreement struck with Premira on 9/9/2016, PAH will issue these shares to Premira before 12/15/2016. (more on this below, but note that in addition to issueing 5.5 million common shares, PAH will pay Premira $460 million cash by 12/15/2016).  

     
    The following table summarizes the six acquisitions which comprise PAH.
     

    PAH’s Businesses

     

    (millions)

    Alent

    OMG + OMG Malaysia

    Arysta

    CAS

    Agriphar

    MacDermid

    Totals

    Acquisition date

    12/01/15

    10/28/15

    02/13/15

    11/03/14

    10/01/14

    10/31/13

     

    Cash paid

    1,507.0

    237.8

    2,856.2

    984.0

    350.2

     

     

    Note receivable settlement

     

    125.0

     
     
     
     

     

    Equity instruments

    231.4

     

    645.9

    52.0

    16.6

     

     

    Derivative liability

     
     
     
     

    3.5

     

     

    Acquisition transaction costs

    21.1

    7.0

    30.2

    23.6

    3.2

    41.4

     

    total acquisition cost

    1,759.5

    369.8

    3,532.3

    1,059.6

    373.5

    1,900.0

    8,994.7

     
     
     
     
     
     
     
     

    Earnings (GAAP)

    64.0

    22.1

    (98.0)

    22.1

    19.0

    (47.0)

    (0.9)

    EBIT

    100.0

    34.0

    79.0

    34.0

    29.0

    9.0

    320.0

    EBITDA

    112.0

    48.0

    148.0

    54.0

    35.0

    63.0

    460.0

    Net tangible assets

    (115.1)

    45.7

    1,704.6

    255.0

    201.0

    (518.4)

    1,572.8

     
     
     
     
     
     
     

     

    Acquisition price / earnings

    27.5

    16.7

    NA

    47.9

    19.7

    NA

    NA

    Acquisition price / EBIT

    17.6

    10.9

    44.7

    31.2

    12.9

    211.1

    31.6

    Acquisition price / EBITDA

    15.7

    7.7

    23.9

    19.6

    10.7

    30.2

    19.6

    Acquisition price / tan. BV

    NA

    8.1

    2.1

    4.2

    1.9

    NA

    5.7

     

    PAH spent $9 billion acquiring these six businesses since 10/31/2013; with a current enterprise value of $6.7 billion, perhaps PAH represents a bargain? We don’t think so. The earnings and EBIT and EBITDA data in the above table are constructed from the historical performance of each business immediately prior to its acquisition by PAH.  Where possible, we averaged the prior three years of performance.  By this methodology, PAH paid an average of 32x trailing EBIT, 20x trailing EBITDA and just shy of 6x tangible book value for these businesses. As value investors, these valuations strike us as very rich.  Furthermore, these valuations are considerably higher than the valuations PAH touts because they make numerous adjustments to their EBITDA calculations.  We make two inferences:

     
    1. PAH paid very high prices for its collection of businesses (20x trailing EBITDA) – little wonder that PAH’s enterprise value is 25% below the combined cost of these acquisitions.

     
    1. PAH management is less than clear in its disclosure of the prices it paid for its six businesses.

     

    One interesting point that corroborates the second inference is PAH’s explanation of the CAS acquisition.  CAS stands for Chemtura AgroSolutions which is owned by Chemtura (CHMT on the NYSE).  While PAH characterizes CAS as an acquisition of a chemical business, what PAH actually purchased for $1.06 billion was four years of distribution rights for Chemtura’s AgroSolutions business.  To be clear, PAH did not purchase the plant and facilities to make the business’s products (they did buy current assets and liabilities).  To make matters worse, on 11/3/2018, their contract with Chemtura expires (Chemtura 2015 10-K, p. 65).  Chemtura characterizes their contract with PAH as “at cost” and recognized $35 million of EBITDA in this segment during 2015 from selling chemicals to PAH. Chemtura management estimates that their contract with PAH is $230 million below market ($57.5 million per year over four years). Two more inferences come to mind:

     
    1. The historical EBITDA for the CAS business must be adjusted for the portion of EBITDA retained by Chemtura; we use Chemtura’s 2015 EBIT ($35 million) from this segment as a proxy for this adjustment. This depresses the EBIT (by $35 million annually) that PAH is likely to make from this business.

     
    1. After 11/3/2018, PAH will need to pay a market rate for the chemicals sold by this part of their business.  Assuming Chemtura’s estimate of the contract economics are about right, PAH’s EBIT will decline by about $57.5 million per year when the below market contracts roll-off in 2018.

     

    We don’t think the market understands that PAH’s acquisition of CAS could be more accurately characterized as a four-year distribution agreement than it as an acquisition of a business. More importantly than what we think, let’s take a look at what a sophisticated chemical industry investor, with intimate knowledge of a large portion of PAH’s business, thinks about PAH.  

     

    The sophisticated investor we have in mind is Premira Advisers, a large European based private equity firm.  Premira acquired Arysta Life Sciences, a Japanese agricultural chemical company (insecticides, fungicides and herbicides), for $2.4 billion in March 2008.  After owning the business for six years and 11 months, Premira sold it to PAH for $3.5 billion. As part of the Arysta acquisition, PAH issued $600 million of preferred shares (Series B) to Premira Advisors.  These shares were convertible, at the discretion of Premira, into PAH common shares at $27.14 per share.  In the event that Premira elected not to convert the shares by 4/20/2017, PAH was obligated to make Premira whole for the difference between the converted value of the shares and $600 million. On 9/9/2016, PAH and Premira reached an agreement which accelerated the term of this deal from 4/20/2017 to 12/15/2016 in exchange for a $93 million reduction in the value. The following table summarizes the original deal and the re-negotiated deal:

     

    Series B Convertible Preferred Share Extinguishment Terms

    (millions)

    Original deal w/ Premira

    9/9/2016 Settlement w/ Premira

    PAH common shares issued upon Series B preferred conversion

    22.1

    5.5

     
     
     

    Current market value of common shares to be issued upon Series B conversion

    187.3

    46.6

    Make whole cash payment, originally due 4/20/2017, now due 12/15/2016

    412.7

    460.0

    Total value

    600.0

    506.6

     

    The essence of the renegotiated deal is that Premira reduced the settlement costs from $600 million to $507 million (15.5%) in exchange for accelerating the settlement by four months and increasing the ratio of cash /  PAH common shares received as part of the settlement. One may infer that the Premira partners responsible for the sale of the Arysta business to PAH are not especially confident in PAH’s prospects.  In fairness, it should be noted that PAH issued 48.8 million common shares a week after renegotiating the deal with Premira – perhaps the Premira partners are sleeping easier regarding their upcoming December 2016 payment (if not feeling a bit burned on the timing of PAH’s share offering).  

     

    What may have lead the Premira partners to accept the $93 million hair cut?  Note that a substantial portion of PAH’s revenue is from developing markets (exactly how much is not disclosed).  Here is what PAH had to say about this in their 2015 10-K:

     

    Our consolidated financial statements are reported in U.S. Dollars while a significant proportion of our assets, liabilities and earnings are denominated in non-U.S. Dollar currencies. As a result, we are exposed to foreign currency exchange rate fluctuations from translating certain of our foreign subsidiaries’ financial statements. (PAH 10-K, 3/11/2016, PDF p. 29).

     

    At the time of the Arysta acquisition, 65% of Arysta’s revenue came from Latin America, Africa, Eastern Europe, China, and South Asia. Yet 80% of PAH’s considerable debt load is denominated in dollars (the balance in euros).  This leaves PAH vulnerable in the event the dollar appreciates substantially against the currencies of the countries in which it transacts business.  The following table summarizes PAH’s current debt structure:

     

    PAH Debt Structure

     
     
     

    Balance

    Annual

    (millions)

    Interest rate

    9/30/16

    interest cost

    Sr. Notes due 2022

    6.500%

    1,082.5

     

    EUR Sr. Notes due 2023

    6.000%

    387.6

     

    Sr. Notes due 2021

    10.375%

    488.5

     

    First lien credit facility, US$, due 2023

    5.000%

    2,620.0

    modified 10/17/16

    First lien credit facility, EUR, due 2023

    4.750%

    638.0

    modified 10/17/17

    Borrowings under credit lines

    3.520%

    42.8

     

    Other

    6.024%

    18.9

     

    totals

    6.990%

    5,278.3

    369.0

     

    Note that PAH’s annual interest costs run about $369 million.  When combined with minimum principal payments and operating lease payments, PAH has financial obligations north of $400 million per year.  The following table summarizes PAH’s financial obligations through 2021:

     

    PAH Financial Obligations

     

    (millions)

    Min. Principal Payments

    Min. Operating lease payments

    Interest cost

    Total fixed charges

    Q4 2016

    8.9

    10.2

    369.0

     

    2017

    34.9

    26.0

    369.0

    429.9

    2018

    34.8

    17.7

    369.0

    421.5

    2019

    34.6

    12.0

    369.0

    415.6

    2020

    3,218.8

    9.8

    369.0

    3,597.6

    2021

    500.7

    8.7

    369.0

    878.4

    Thereafter

    1,494.4

    26.8

    369.0

    1,890.2

     

    5,327.1

    111.2

    2,582.7

     

     

    While PAH management often refers to adjusted EBITDA figures that are well in excess of $400 million, if we strip-out one-time gains made during the 9 ME 9/30/2016 (e.g., the gain from the renegotiated Series B settlement with Premira Advisers), PAH produced $435 million of EBITDA during the first three quarters of 2016. A continued downturn in the agricultural chemicals market and/or a downturn in the plating chemicals market coupled with further appreciation of the dollar could result in PAH producing less real (i.e., none-adjusted) EBITDA than its financial obligations.  And while management describes its business as “Asset-Lite, High-Touch,” it spends $30 - $40 million of capex annually just to stay in business. Also, its below market distribution deal with Chemtura ends in 24 months, which will depress EBITDA by about $57 million annually. We conclude that, even allowing for the recent equity infusion, PAH is not exactly a well-capitalized business.

     

    Finally, to the extent PAH is truly “Asset-Lite, High Touch,” the company is more dependent on its employees than a typical specialty chemical business – i.e., its employees are its most important asset.  While this sounds good in theory, in practice, it is not the best fit for a company organized  by a financial engineer with no background in the specialty chemical industry.  Not surprisingly, anecdotal data suggests there are employee satisfaction problems at PAH.  The following table is comprised of the comments posted by PAH employees to Glassdoor.com, a website which tracks employee satisfaction at companies.

     

    PAH Employee Comments Posted to Glassdoor.com

     

    Date

    Positive Comments

    Negative Comments

    Advice to management

    Rating (5=best)

    09/15/16

    If you thrive on change and chaos, this place is for you! Opportunity to help build something great, if it can be saved!

    High stress, long hours. The most awful benefits I have EVER seen. Leadership can't make up its mind, very high attention deficit.

    Focus on talent, and take care of your people. Employee retention will be paramount while the organization figures itself out. Continue implementing a solid framework for the businesses to operate in.

    1

    06/14/16

    I cannot think of any

    Poor leadership, disjointed company, it feels like senior leadership is rough out of college, no culture, they do not invest in their employees.

    Leadership training, change management.

    1

    04/04/16

    Outstanding products and customers but this is a painful mash-up of recently bought-out companies.

    Ongoing loss of senior managers. Well over half of the acquired company leadership has left since the buy-outs commenced 18 months ago. This has been unplanned and therefore unexpected. Communication from the new ownership has been lacking. Our locations are disrespected with juvenile name-calling. We ran lean. No fancy buildings, but this is not a justification for calling our site a ghetto. If they didn't want our people or our facilities, then why did they buy us?

    The new owners have demoralized us. We are suffering and distracted. The customers are not of primary concern anymore, rather we are told to deliver on "synergies" first. Our IT and accounting systems are broken yet our top leaders fly in the biggest and best private jets. And they won't come to our locations because they do not appeal to them (recall the ghetto remarks). Our share price has gone from $28 to as low as $5 in less than a year from being bought out. Travel to each and every site and let us know what you are going to do to recover what you have destroyed thus far.

    1

    03/16/16

    Great people, very nice, friendly.

    Long hours, demanding. Work week averages 65 to 70 hours / pay tends to be lower than market given the hours expected.

     

    1

    02/15/16

    Great benefits & working environment.

    The company is changing and expanding rapidly

     

    4

     
     

    Given the hurly-burly acquisition activity at PAH, it is not surprising that employee satisfaction is low.  In a business with very high barriers that doesn’t rely on “high-touch,” such comments could be dismissed as growing pains.  However, in a business that relies on high-touch, employee dissatisfaction is a recipe for disaster.  Accordingly, we recommend shorting this particular disaster.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    time

    further dollar appreciation

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