By Shaun Currie, Manalapan Oracle Capital Management Intelligent Investing Challenge The analyses and conclusions contained within this presentation are based on publicly available information. This presentation is for general informational purposes only, and does not constitute an agreement, offer, solicitation of an offer, or any recommendation to enter into or conclude any transaction or confirmation thereof (whether on terms shown herein or otherwise). This presentation should not be construed as legal, tax, investment, financial, or other advice. It does not have regard to the specific investment objective, financial situation, suitability, or the particular need of any specific person who may receive this presentation, and should not be taken as advice on the merits of any investment decision.
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The author reserves the right to change any of its opinions expressed herein at any time as it deems appropriate. The author disclaims any obligation to update the data, information or opinions contained in this presentation. Disclaimer Shaun Currie, Manalapan Oracle Capital Management, LLC - Long: Chemtura Corp I nvestment Thesis See Appendix C for detailed write-up of Investment Thesis We believe that Chemtura is a misunderstood company whose business today is much different than it was only a few years ago. Once an over-leveraged, broad-based chemicals company, Chemtura has been transforming its business through asset divestitures to improve its balance sheet and become a pure-play on the industrial space. The companys recent announcement to divest its AgroSolutions business will enable the company to reach a net-cash position for the first time since returning to the public markets in 2010, and will set up the company to pay down expensive debt and return cash to shareholders. We project that the company will use the proceeds of AgroSolutions transaction, along with excess cash on the balance sheet, to pay down $200MM in debt (which will reduce interest expense by $13.6MM annually) and to initiate a tender offer to repurchase approximately one-third of the current shares outstanding by year-end 2014. We also project that the tender offer will need to be completed at a premium to the current stock price, which will enable investors to see sizeable returns over the intermediate-term while limiting the downside in the stock. Additionally, we believe that this is still the early innings of the companys goal to unlock shareholder value CEO Craig Rogerson has a history of monetizing companies and has openly stated that the rest of the company or its individual pieces could be sold. Our sum-of the-parts analysis will show that the company is currently valued at a discount to its peers and similar transactions, which supports the idea that additional value-creating transactions could occur. These transactions should result in an additional 40-100% upside (after the tender offer is completed) for shareholders that could be realized over the coming year. Even if these types of events do not come to fruition, the company has been making big investments its two remaining industrial segments, and late 2014/early2015 is the time in which these investments should start to pay off. The growth prospects for these two businesses alone could result in a re-valuation of the company, which currently trades at a discount to public peers due to an incorrect perception of the business and its future outlook. Our blended valuation, using a public comps analysis and a sum-of-the-parts analysis, gives us a $41 price target, representing 60% upside to the current price. (See Appendix C for detailed write-up) Catalysts See Appendix B for more detail on Catalysts 1. The companys plan to repurchase 1/3 of the outstanding shares through a tender offer by year-end 2014. 2. Increased Capex Ends in 2014 and investments begin to be realized, resulting in increased cash flow and improved metrics going forward. 3. IPP segment capacity expansion comes online in late 2014, with demand already waiting to be filled, resulting in significant growth going forward. 4. IEP Emerald Innovation, the companys new technology, growth supported by recent adoption within Dow Chemical and BASF along with European regulation to ban previous technology, HBCD, by 2015. 5. MATS regulation implementation in 2015 sets up Chemtura for growth out of its bromine business going forward. Key Risks - See Appendix B for more detail on Risks 1. The inability to close the AgroSolutions deal 2. The inability to drive sales growth out of its IEP foams business 3. Increased regulatory scrutiny over the use of bromine foams 4. A delay in the opening of the companys China synthetics facility Valuation 1. Public Comps Analysis (Going Concern) See Appendix A for Comps Valuation (Based Upon 2016 Estimates) Low Base High Chemtura Corp
4A Sum-of-the-Parts Comps/Valuation Industrial Performance Products Comparables Type Date EBITDA Multiple Notes Lubrizol Acquisition Buyout Mar-11 7x Acquired by Berkshire Hathaway New Market Corporation Current Public Company Jul-14 12.8x Hercules Sale Company Sale Nov-08 8.5x Bought by Ashland
Industrial Engineered Products Comparables Type Date EBITDA Multiple Notes Albemarle Corporation Current Public Company Jul-14 10.6x Israel Chemicals Limited Current Public Company Apr-14 11x Amcol Acquisition Company Sale Mar-14 11x Bought by Minerals Technologies, 8.5x EBITDA multiple after synergies
Sum-of-the-Parts Analysis (Company Sale) Low Base Bull Low Base Bull Low Base Bull Industrial Performance Products 160.00 $ 190.00 $ 210.00 $ 7.0x 9.0x 12.8x 1,120.00 $ 1,710.00 $ 2,688.00 $ Industrial Engineered Products 125.00 $ 177.00 $ 185.00 $ 8.5x 9.6x 11.0x 1,062.50 $ 1,699.20 $ 2,035.00 $ Total Segment Value 285.00 $ 367.00 $ 395.00 $ 7.7x 9.0x 11.3x 2,182.50 $ 3,409.20 $ 4,723.00 $ Less: Corporate Expenses (including $30MM Synergies) (60.00) $ (60.00) $ (60.00) $ 7.7x 9.0x 11.3x (462.00) $ (540.00) $ (678.00) $ Plus: Cash & Equivalents 545.00 $ 395.00 $ 245.00 $ Less: Debt (588.00) $ (588.00) $ (588.00) $ Less: Pension Obligations (239.00) $ (239.00) $ (239.00) $ Total Equity Value 1,438.50 $ 2,437.20 $ 3,463.00 $ Shares Outstanding 74.7MM 67.7MM 64.7MM Price Per Share 19.26 $ 36.00 $ 53.52 $ Upside/Downside -24.5% 41.2% 109.9% 2015 EBITDA Valuation Multiple Value ($ in Millions) Appendix B Catalysts and Risks Defined 1B - Catalysts 1. The companys plan to repurchase 1/3 of the outstanding shares through a tender offer by year-end 2014 - as a result of the AgroSolutions divestiture, the company plans to use the proceeds from the transaction, along with excess cash on the balance sheet, to return capital to shareholders. After speaking with management, we project the company to repurchase between $700MM and $1B of stock by year-end 2014. Management recently noted that they are looking at various options to return this cash, which include a Tender Offer, a special dividend of up to $7 per share (27.5% return), or some combination of the two. Considering the company has stated it believes its value is about $40 per share and the fact that our analysis supports this conclusion, we believe that the company will decide to repurchase about 1/3 of the current outstanding shares through a tender offer by the end of this year. Chemtura is in essence 100% institutionally owned, with most of this ownership coming from investors with long-term investment horizons. Based upon this, combined with our sum-of-the parts valuation and the fact that the company currently trades at a discount to its peers, we believe that the company will have to tender the stock at a premium to its current price. 2. Increased Capex Ends in 2014 - After major investments over the past few years, the companys remaining two businesses, Industrial Performance Products and Industrial Engineered Products, are poised for growth starting in the back half of 2014. As performance improves and capital expenditures normalize, we believe that these two businesses alone will produce over $200MM in free cash flow annually. 3. IPP Segment Capacity Expansion - On the IPP side of the business, Chemtura has decided to turn its focus to the synthetic lubricants market, and has been making big investments over the past several years that should now start to pay off. Exxon Mobile is currently the only other major player in this space, but Exxon has historically not sold its synthetics out into the market, but instead put it in its own Mobile One product. This creates a dynamic where Chemtura is the only game in town and therefore can get better pricing on its product, thus increasing its operating margins. The companys new synthetic lubricants facility in the Netherlands (which is located close to one of its biggest customers, BP) recently opened and its synthetic lubricant facility in China will come online this year. Management has stated that customers are chomping at the bit for this new capacity to ramp up and expects to utilize it very quickly after it is up and running. Management expects the IPP business to do about $1.3 billion is sales by 2016, with margins in the 18-19% range. 4. IEP Emerald Innovation Growth - In the foams business (IEP business), 2013 was a challenging year due to the fact that ICL aggressively entered the market by offering reduced prices across the board. This dynamic/weak performance is one of the reasons for the recent downward pressure on the stock, but we believe that the extent of this downward pressure is unjustified. Though pricing pressure would normally be a significant negative event for Chemtura, this risk is offset by the companys push into its new technology, the Emerald Innovation series, which commands higher prices and is an area in which Chemtura is clearly ahead of the competition from a technological standpoint. The Emerald series provides the same flame retardant benefits of other bromine foam products, but does so in a way that is cleaner for the environment. Both Dow Chemical and BASF have recently adopted the technology and Europe could ban the use of the previous technology, HBCD, by 2015. 5. MATS Regulation - The other major piece of Chemturas IEP business is the use of bromine in trapping mercury emissions. When the companys GeoBrom product is used to treat coal that is used in power generation, mercury emissions are typically reduced by 98%. Though there is no catalyst for growth in this business during 2014, 2015 should be a big year for GeoBrom due to the Mercury and Air Toxics Standards (MATS) which will then go into effect. These standards, which require US coal power generation and oil fleets to meet certain emission standards or close down by April 2015, were being contested on the grounds that the EPA did not have the power to enact such a law. On April 29 of this year, the courts ruled that the EPA does indeed have the power to enact the law and can proceed with its 2015 implementation. This announcement can be considered a major win for Chemtura; with the high costs associated with retrofitting a power plant, Chemturas GeoBrom product provides a strong, value-oriented alternative. Additionally, this removes the risk that the regulation could be pushed out into 2016 or beyond. 2B - Key Risks 1. The inability to close the AgroSolutions deal - As a mitigate to this risk, the AgroSolutions business, which has been growing revenues at 9-10% annually, as a going- concern piece of Chemtura would add about $120MM in EBITDA to our 2015 forecast and would result in 2015 EPS of about $2.50 (company would currently be trading at 5x 2015 EBITDA and 9x 2015 EPS, both below peer averages). Platform Specialty Products has already raised $300MM of the needed cash for this transaction, and is also backed by a large investment from Bill Ackman, which we believe to be a positive for Platforms ability to raise the additional funding for the deal. 2. The inability to drive sales growth out of its IEP foams business - This risk would impair our valuation of the company, but we do note that even under a flat revenue scenario, operating income will improve in 2014 due to cost cutting initiatives that have been put into place. 3. Increased regulatory scrutiny - in 2014, California passed legislation requiring tests to be done with regards to the health and safety risks of materials used in upholstered furniture. This could directly affect Chemturas bromine foam products used in its flame retardant upholstery filling line. Management has been open to address this issue, and sees little possibility of the companys products being affected by the new regulation. 4. A delay in the opening of the companys China synthetics facility this would push out the ramp-up in revenues of the synthetics business due to capacity constraints. Appendix C Full Write-up Long: Chemtura Corp Executive Summary Over the past several years, the management team at Chemtura has done a great job of divesting non-core assets, improving its balance sheet, cutting costs, and streamlining its business to become a pure-play on industrial specialty chemicals. Yet, these actions seem to have gone unnoticed as the company still trades at a significant discount to its peers. The recent announcement of the sale of its AgroSolutions business will allow the company to both pay off debt, resulting in annual interest expense savings of $13.6MM, and initiate a stock repurchase tender offer for approximately one-third of the outstanding shares. We expect this tender offer to be completed at a 20% premium to the current stock price, which we believe will be finalized by year-end 2014. After the tender offer is completed, we expect to company to continue to pursue the sale of the remaining businesses. CEO Craig Rogerson has a history of monetizing companies and has openly (and recently) stated that he could look to pursue this option with Chemtura. Our sum-of-the-parts analysis supports 40-100% upside from the current stock price. Even without a sale of the business or its remaining pieces, we still believe there is attractive upside in the stock. The company has made significant investments in its remaining two industrial businesses, Industrial Performance Products (IPP) and Industrial Engineered Products (IEP), and each have their own specific catalysts upcoming that will drive future growth. We believe that as investors take notice of this growth and the value- creation events the company has recently completed, the company will be valued more in-line with its peers, which would result in 60% upside to the current stock price. Investment Thesis We believe that Chemtura Corp is a misunderstood company whose business today is much different than it was only a few years ago. Once an over-leveraged, broad-based chemicals company, Chemtura has been transforming its business through asset divestitures to improve its balance sheet and become a pure-play on the industrial space. The companys recent announcement of its divestiture of the AgroSolutions business will enable the company to reach a net-cash position for the first time since returning to the public markets in 2010, and will set up the company to pay down expensive debt and return cash to shareholders. We project that the company will use the proceeds of AgroSolutions transaction, along with excess cash on the balance sheet, to pay down $200MM in debt (which will reduce interest expense by $13.6MM annually) and to initiate a tender offer to repurchase approximately one-third of the current shares outstanding by year-end 2014. We also project that the tender offer will need to be completed at a premium to the current stock price, which will enable investors to see sizeable returns (20%) over the intermediate-term while limiting the downside in the stock. Additionally, we believe that this is still the early innings of the companys goal to unlock shareholder value CEO Craig Rogerson has a history of monetizing companies and has openly stated that the rest of the company or its individual pieces could be sold. Our sum-of the-parts analysis will show that the company is currently valued at a discount to its peers and similar transactions, which supports the idea that additional value-creating transactions could occur. These transactions should result in an additional 40-100% upside (after the tender offer is completed) for shareholders that could be realized over the coming year. Even if these types of events do not come to fruition, the company has been making big investments its two remaining industrial segments which should start to pay off in the coming year, and could result in a re- valuation of the company based solely on its own merits. Business Overview Chemtura Corporation traces its roots to its predecessor, Crompton & Knowles, which was founded in 1900 and entered the specialty chemicals market in 1954. In the mid-1990s, the company decided to exclusively focus on specialty chemicals, and completed the acquisition of Witco Corporation in order to grow this business. In 2005, the company merged with Great Lakes Chemical Corporation and changed its name to Chemtura. In 2009, with an over-leveraged balance sheet and little liquidity, the company filed for Chapter 11 bankruptcy reorganization. Following the subsequent Chapter 11 filing of its Canadian subsidiary, the company re-emerged from bankruptcy protection and went public in the latter half of 2010. At the time of the IPO, the company was still over-leveraged and lacked the focus necessary to compete effectively. CEO Craig Rogerson made it a priority to divest non-core assets in order to improve the balance sheet and re-focus the business going forward. In April of 2013, Chemtura closed on the sale of its Antioxidant & UV Stabilizers business for $200MM. Later that year, the company closed on the sale of its Consumer Products segment for $315MM. Proceeds from these transactions were used to improve the balance sheet and return capital to shareholders (the company has bought back $110MM of stock to date). In April of this year, the company announced that it had reached an agreement to sell its AgroSolutions business for $1 billion, with an expected closing in the second half of 2014. The ending result of these moves is a company with ample liquidity and an improved focus on the industrial segment of the market. The company has made major investments over the past few years in its remaining two businesses, Industrial Performance Products (IPP) and Industrial Engineered Products (IEP), and the second half of 2014/FY2015 is the time in which these investments will start to be realized. CHMTs Industrial Performance Products (IPP) segment focuses on the production of synthetic lubricants, additives, and urethanes. The lubricant products are used in variety of industrial applications, but the biggest driver of this business is the automotive industry, where the company produces petroleum additives and gear/engine lubricants. Growth in this segment will come from the expansion of its high-end synthetics business (where there is only one other competitor, who normally does not sell its products into the market) and its investments in production capacity. In the Industrial Engineered Products (IEP) business, Chemtura competes in an Oligopoly, with the other two major players being Albemarle Corporation and Israel Chemicals Limited (ICL). The companys products in this segment involve the use of bromine, which exists as bromide salts in crustal rock within the earth. Although Chemtura only controls one-sixth of the bromine market, it is the clear leader the bromine foams market (flame retardants) and mercury emissions prevention. When bromine is isolated, it can be combined with other molecules during the production of polymers to form materials with excellent flame retardant properties (such as foams). When bromine treated materials burn, they produce hydrobromic acid which interferes with the oxidation and combustion reactions of fire. Bromine can also be used to treat coal during power generation, and has been shown to reduce Mercury emissions by up to 98%. Additionally, bromine intermediaries are used during the manufacturing of numerous industrial, consumer, and energy products. It can be used to produce very dense fluids used in the oil and gas industries, as well as organometallics, which are a special group of metals used in polymerization reactions. Examples of this would be in the production of glass coatings, semiconductors, LEDs, and pharmaceutical intermediates. Once a broad-based chemicals company with little direction, Chemtura has become one of the leaders in the industrial specialty chemical industry. This focus was reinforced earlier this year when the company announced the sale of its agricultural chemicals segment. AgroSolutions Transaction a Key Catalyst for Tender Offer On April 17, 2014, the company announced that it had reached an agreement with Platform Specialty Products Corporation to sell its AgroSolutions business, the companys agricultural chemicals segment, for $1 billion ($950MM in cash and $50MM in stock, which will have a 6- month lock-up period attached to it). Because Chemtura has significant NOLs it can use to offset taxes on the sale, the company plans to bring in proceeds of about $850MM out of the $950MM in cash it will receive. Management does not anticipate any regulatory hurdles to the deal and expects to take $15-20MM of stranded costs out of its business once the sale occurs. This transaction will return the company to a net-cash position, something that company has not seen since it re-emergence from bankruptcy in 2010. We believe that part of the reason for the companys discounted valuation as compared to peers is due to its previously weak balance sheet. Once the AgroSolutions transaction is complete (second half of 2014), we believe that investors will re-value the company more in-line with peers due to its improved liquidity position. The catalyst of greater significance as a result of the AgroSolutions divestiture is the companys plan to use the proceeds from the transaction, along with excess cash on the balance sheet, to pay down expensive debt and return cash to shareholders. On the debt side of the balance sheet, the company plans to pay off $200MM of debt. The companys 7.875% Notes become callable at 104% of par in September of 2014, and we project that this will be the first piece of the capital structure which the company pays off. We also project that the company will then use an additional $100MM to pay off a portion of its 5.75% Notes. Below is the companys pro-forma balance sheet after debt pay downs: Capitalization ($ in Millions) Before After After Debt Paydown Cash $ 400.00 $ 1,250.00 $ 1,046.00 PSP Stock $ - $ 50.00 $ 50.00 Cash & Equivalents $ 400.00 $ 1,300.00 $ 1,096.00
After the debt transactions are completed, the company will save $13.6MM in annual interest expense (96MM shares outstanding, which we believe will be reduced to approximately 67.7MM shares by the end of this year). After speaking with management, we also project the company to repurchase between $700MM and $1B of stock by year-end 2014. The company has already begun to repurchase stock in the open market, buying $110MM of stock since 2011, but has openly acknowledged that it will need to look at other options in order to repurchase a significant amount of the float after the AgroSolutions transaction is completed. Management recently noted that they are looking at various options to return this cash, which include a Tender Offer, a special dividend of up to $7 per share (27.5% return), or some combination of the two. Considering the company has stated it believes its value is about $40 per share and the fact that our analysis supports this conclusion, we believe that the company will decide to repurchase about 1/3 of the current outstanding shares through a tender offer in order to complete its desired share repurchase activity. Chemtura is in essence 100% institutionally owned, with most of this ownership coming from investors with long-term investment horizons. Based upon this, combined with our sum-of-the parts valuation and the fact that the company currently trades at a discount to its peers, we believe that the company will have to tender the stock at a premium to its current price, which we forecast to be in the $30 range, in order to complete a transaction in the $700MM-$1B range. This event would provide investors a 20% return by years end without any re-valuation of the company. Tender Offer Scenarios ($ in Millions) Low Base Bull Current Shares Outstanding 96MM 96MM 96MM
Though the recent announcement of the AgroSolutions unit sale is an exciting inflection point for the company, we believe that there is additional upside in the stock after the tender offer is completed. Once this transaction is finalized, the company will have gone from an over- leveraged, broad-based chemicals play to a streamlined, niche-focused industrial chemicals company. Not only have the recent divestitures helped reduce costs and given the company a better focus going forward, they also make the company a more attractive investment for both public equity investors as well as other companies as an acquisition target. Additional Value Remains after AgroSolutions Transaction Even though the tender offer is an attractive scenario for shareholders in its own right, we believe that the real value in Chemtura is found in the business that remains after the sale. After major investments over the past few years, the companys remaining two businesses, Industrial Performance Products and Industrial Engineered Products, are poised for growth starting in the back half of 2014. As performance improves and capital expenditures normalize, we believe that these two businesses alone will produce over $200MM in free cash flow annually, which gives us confidence in the companys plan to return excess cash to shareholders this year.
Source: Chemtura Investor Presentation Both the IPP and IEP segments have their own specific catalysts that should drive future growth. On the IPP side, pending capacity expansion and technological innovation should drive both revenue growth and improved operating margins. Chemtura has decided to turn its focus in this segment to the synthetic lubricants business, and has been making big investments over the past several years that should now start to pay off. Synthetic lubricants increase the viscosity of motor oils, which allow for longer oil change ranges or for use in higher-end vehicles. Exxon Mobile is currently the only other major player in this space, but Exxon has historically not sold its synthetics out into the market, but instead put it in its own Mobile One product. This creates a dynamic where Chemtura is the only game in town and therefore can get better pricing on its product, thus increasing its operating margins. On the revenue side, the company will benefit from its investments in added capacity. Its new synthetic lubricants facility in the Netherlands (which is located close to one of its biggest customers, BP) opened at the end of 2013 and its synthetic lubricant facility in China will come online in 2014. Management has stated that customers are chomping at the bit for more capacity to come online and expects to utilize the new capacity very quickly after it is up and running. Management expects the IPP business to do about $1.3 billion is sales by 2016, with margins in the 18-19% range. After reviewing the new capacity and completing a sensitivity analysis under various scenarios, we believe that it is very plausible that management hits this goal, and are therefore using it as our base-case assumption. In the IEP business, Chemtura competes in an Oligopoly, with the other two major players being Albemarle Corporation and Israel Chemicals Limited (ICL). Although Chemtura only controls one-sixth of the bromine market, it is the clear leader the foams market (flame retardants) and mercury emissions prevention market. In the foams business, 2013 was a challenging year due to the fact that ICL aggressively entered the market by offering reduced prices across the board. This dynamic/weak performance is one of the reasons for the recent downward pressure on the stock, but we believe that the extent of this downward pressure is unjustified. Though pricing pressure would normally be a significant negative event for Chemtura, this risk is offset by the companys push into its new technology, the Emerald Innovation series, which commands higher prices and is an area in which Chemtura is clearly ahead of the competition from a technological standpoint. The Emerald series provides the same flame retardant benefits of other bromine foam products, but does so in a way that is cleaner for the environment. Both Dow Chemical and BASF have recently adopted the technology and Europe could ban the use of the previous technology, HBCD, by 2015. Also, because of the weak results in 2013, the company took steps to take costs out of the business, including the elimination of many management positions in which it found redundancies. Even if the adoption of the new technology is not as fast as we project, the company recently noted that pricing has improved for HBCD this year. This, along with cost cuts made by management last year will help this business improve results in 2014 over 2013s disappointment. The other major piece of Chemturas IEP business is the use of bromine in trapping mercury emissions. When the companys GeoBrom product is used to treat coal that is used in power generation, mercury emissions are typically reduced by 98%. Though there is no catalyst for growth in this business during 2014, 2015 should be a big year for GeoBrom due to the Mercury and Air Toxics Standards (MATS) which will then go into effect. These standards, which require US coal power generation and oil fleets to meet certain emission standards or close down by April 2015, were being contested on the grounds that the EPA did not have the power to enact such a law. On April 29 of this year, the courts ruled that the EPA does indeed have the power to enact the law and can proceed with its 2015 implementation. This announcement can be considered a major win for Chemtura; with the high costs associated with retrofitting a power plant, Chemturas GeoBrom product provides a strong, value-oriented alternative. Additionally, this removes the risk that the regulation could be pushed out into 2016 or beyond. This new regulations impact on Chemtura cannot be understated; this is an area in which there has been very little investment by customers over the last several years, and the new mercury emission standards should provide a multi-year runway of growth for the GeoBrom business. The wildcard for the IEP business is the possibility to close on the acquisition of Solaris ChemTech. In September 2012, Chemtura announce an agreement to purchase from Solaris certain assets used in the manufacturing and distribution of bromine and bromine chemicals for cash consideration of $142 million and the assumption of certain liabilities, but the companies have been unable to gain government approval to close the transaction. If Chemtura is able to close this deal, it would be an unexpected, major catalyst for the stock as it would increase the supply of bromine available to the company. Because of the companys inability to close on this deal, we are assigning no value to a positive outcome in our analysis. As we stated above, we believe managements assumptions for the IPP business are reasonable based upon increased capacity and growth in its synthetics business. On the IEP side, we expect a rebound in both revenues and margins in 2014 based upon the cost savings initiatives, growth in the companys Emerald Innovation series, and pending Mercury Control Standards taking shape as we enter 2015. These two remaining units alone will produce between $150MM and $175MM in free cash flow (6-7% free cash flow yield) through FY2014, at which point free cash flow generation should improve as the increased investment period ends and the company realizes the benefits of its recent investments. As these projections come to fruition over the coming year, along with the share repurchase tender offer, we believe that investors will re-value Chemtura in-line with its peers. Below, we have provided our outlook for the business along with comparable company multiples:
Total Company EBITDA 400.3 385.4 441.1 Operating Income 202.3 202.4 256.1 Interest Expense 38.0 25.0 25.0 Earnings Before Taxes 164.3 177.4 231.1 Taxes - 17.7 57.8 Net Income 164.3 159.6 173.4 Free Cash Flow $ 169.3 $ 179.6 $ 208.4 Diluted Shares Outstanding 94.0 67.7 67.6
Earnings Per Share $ 1.75 $ 2.36 $ 2.56
Chemtura is actually a collection of many unique assets that fall under two business segments, so we will use a blended valuation of Albemarle (to represent IEP) and New Markets Corporation (to represent IPP) to come up with our valuation of Chemtura.
We believe that using a blended valuation of Albemarle and New Markets Corporation is the best way to capture both pieces of Chemturas business. We also believe that the proper way to value Chemtura is to discount back our 2016 projections because 1) by 2016, the company will have used their remaining NOLs, so we will be valuing the company based off a normalized tax rate, 2) valuing the companies like-for-like in 2016 helps us to adjust for different growth rates, and 3) by the beginning of 2016, all activities related to the sale of AgroSolutions, the tender offer, and company-specific catalysts will be completed, providing us a full year of realistic future business results (note: for the next 15+ years, Chemtura will be able to use $60-70MM in NOLs annually, which equals $1 per share in earnings before taxes after share repurchases are completed). As you can see, when Chemtura becomes valued in-line with peers, we believe the stock should be valued 65% higher than its current price at todays fair value, and we also see little downside in the stock at its current levels. Further Monetization Could Occur CEO Craig Rogerson has made no secret to the fact that he may look to further monetize the business after the AgroSolutions transaction is completed, even hinting at this notion during a recent conference presentation. This kind of action would make sense considering Mr. Rogersons background prior to his role at Chemtura, Mr. Rogerson was the CEO of the specialty chemicals company Hercules, and was the driving force behind the companys sale to Ashland in 2008. Before his role as CEO, Mr. Rogerson served as the general manager of BetzDearborn, the industrial water treatment business that Hercules sold to General Electric in 2002. Mr. Rogerson also has a vested interest in this outcome; he currently owns approximately 500,000 shares of the companys stock, an additional 315,000 shares that have not yet vested, and 400,000 options that are yet to be exercised (with an average strike price around $18). Because of the potential for further asset divestitures, or even the possible sale of the entire company, we believe that it is best to value Chemtura by using a sum-of-parts-analysis. Below is a comparable analysis for each of the companys remaining segments: Industrial Performance Products Comparables Type Date EBITDA Multiple Notes Lubrizol Acquisition Buyout Mar-11 7x Acquired by Berkshire Hathaway New Market Corporation Current Public Company Jul-14 12.8x Hercules Sale Company Sale Nov-08 8.5x Bought by Ashland
Based upon comparable transactions, we will use a 7.0-12.8x EBITDA range to value the IPP unit. Industrial Engineered Products Comparables Type Date EBITDA Multiple Notes Albemarle Corporation Current Public Company Jul-14 10.6x Israel Chemicals Limited Current Public Company Apr-14 11x Amcol Acquisition Company Sale Mar-14 11x Bought by Minerals Technologies, 8.5x EBITDA multiple after synergies
Based upon comparable transactions, we will use an 8.5-11.0x EBITDA range to value the IEP unit. As you can see we believe the value of the remaining two businesses are worth about $2.4 billion. When we combine these values with the AgroSolutions sale and adjusting for cash, debt and pension obligations, we could see the equity value of the business being about $4 billion, although the current enterprise value is only $2.8 billion. Based upon the individual values of the remaining segments of Chemtura, we have provided a sum-of-the-parts valuations based upon the sale of the entire business, in which we include about $30MM in projected cost synergies in the transaction, which we believe to be conservative as $15-20MM are the stranded costs from AgroSolutions:
And as you can see from this slide, if the company were to sell the business and if we were to include $30MM in synergies in the sale, with $15-20MM of this coming from the stranded costs of AgroSolutions), we get a value of about $36 on the business. Valuation Below, we have provided our probability weighted valuation for the company: Probability-Weighted Valuation Low Base High Weight % Going-Concern $ 26.89 $ 42.11 $ 55.57 80.0% Company Sale $ 19.26 $ 36.00 $ 53.52 20.0%
Overall, we believe that the value of Chemturas business is worth about $41, representing 60% upside from its current price. We believe that over the next 9 months, investors will realize 20% Sum-of-the-Parts Analysis (Company Sale) Low Base Bull Low Base Bull Low Base Bull Industrial Performance Products 160.00 $ 190.00 $ 210.00 $ 7.0x 9.0x 12.8x 1,120.00 $ 1,710.00 $ 2,688.00 $ Industrial Engineered Products 125.00 $ 177.00 $ 185.00 $ 8.5x 9.6x 11.0x 1,062.50 $ 1,699.20 $ 2,035.00 $ Total Segment Value 285.00 $ 367.00 $ 395.00 $ 7.7x 9.0x 11.3x 2,182.50 $ 3,409.20 $ 4,723.00 $ Less: Corporate Expenses (including $30MM Synergies) (60.00) $ (60.00) $ (60.00) $ 7.7x 9.0x 11.3x (462.00) $ (540.00) $ (678.00) $ Plus: Cash & Equivalents 545.00 $ 395.00 $ 245.00 $ Less: Debt (588.00) $ (588.00) $ (588.00) $ Less: Pension Obligations (239.00) $ (239.00) $ (239.00) $ Total Equity Value 1,438.50 $ 2,437.20 $ 3,463.00 $ Shares Outstanding 74.7MM 67.7MM 64.7MM Price Per Share 19.26 $ 36.00 $ 53.52 $ Upside/Downside -24.5% 41.2% 109.9% 2015 EBITDA Valuation Multiple Value ($ in Millions) of this value through a stock repurchase tender offer, with the rest occurring in 2015 as the company improves results and possibly looks to monetize the rest of the business. Conclusion Chemtura is well past its prior issues bankruptcy, an over-leveraged balance sheet, and a lack of focus. Today, the company is a streamlined, industrial chemicals company with emerging new technologies. The balance sheet has been cleaned up, now to the point where the AgroSolutions divestiture gives us the catalyst necessary to make sizable returns over the intermediate term. Over the next year, we expect more investor to take notice of the improvements at Chemtura, which should cause the stock to be re-valued in-line with its peers. We also believe that there is a realistic chance that company puts itself up for sale over the coming year or looks to sell off its individual assets. In both scenarios, we should see additional upside in the stock over the next 12 months.