A little over a year ago, Pershing Square hedge fund manager Bill Ackman — never one to shy away from activist investing — announced a 31% stake in Platform Specialty Products Corp (NYSE:PAH).
First, we need to get an idea about what PAH is all about. It’s a specialty chemicals company that produces materials for the electronics, automotive, energy and drilling industries. It’s boring but important stuff like surface coatings, and hydraulic control fluids for oil drillers. It also make photopolymers for commercial packaging. It also made some acquisitions that push it into agricultural sciences.
This isn’t everyday stuff and in niches there are riches.
The company reported 2014 earnings this week. Let’s take a look and see what we can glean as far as Bill Ackman is concerned.
PAH revenues rose 13% to $843.2 million compared to $746 million in 2013. However, this included acquisitions. Without these, sales only rose 1.2%.
Net loss for PAH was $263 million including acquisitions, while core net income was $300,000, compared to a net loss of $203.5 million in 2013. Adjusted earnings before interest, taxes, depreciation, and amortization in 2014 increased despite the loss, to $212.2 million, up 17.8%, of which the core business contributed $196.2 million, up 9%.
PAH adjusted net income rose to $113.6 million from $89.6 million, up 27%.
Adjusted EPS increased 28%, from 46 cents to 59 cents, while free cash flow was $148.2 million, up from $97.9 million.
The company’s balance sheet is in good shape with $398 million in cash and $1.4 billion in debt.
What all this seems to suggest is that the company’s core business was relatively stagnant, but that these agricultural acquisitions are what is fueling growth.
Also, just so investors are aware, the company was originally a U.K. shell entity. It purchased the core business, MacDermid, and used that as its launch platform. Then it started adding businesses via acquisition. Bill Ackman has been involved since the beginning.
So really, this is a move engineered from the start to take a private business public, using a shell U.K. company to avoid a complex IPO process, then start adding businesses to beef up the company’s revenue and cash flow generation. In essence, it’s a way of monetizing a number of companies by placing them under one public umbrella listed on the New York Stock Exchange.
That explains the particularly large position in PAH from the outset. So this isn’t really an activist position so much as a “pre-IPO positioning,” if you will.
So what does this mean for investors?
It appears that Bill Ackman got in at the equivalent of about $25.50 per share, and the stock today is at $26. Ackman’s track record can be spotty when it comes to actual activist positions. He struck out with J.C. Penney Co Inc (NYSE:JCP) but hit a grand slam with General Growth Properties Inc (NYSE:GGP).
With stuff like this, it’s important to note he was involved in a similar structure in returning Burger King Worldwide — now part of Restaurant Brands International Inc (NYSE:QSR) after the merger with Tim Hortons — to the public markets. That move has been brilliant.
I think you are banking on Bill Ackman’s acumen on this deal, and given the agricultural acquisitions, which seem to be doing very well, it may be worth investing alongside.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He is the manager of the forthcoming Liberty Portfolio, has 20 years’ worth of experience in the stock market and has written more than 1,200 articles on investing. As of this writing, he did not hold a position in any of the aforementioned securities. He can be reached at TheLibertyPortfolio@gmail.com.
