A key part of the restructuring of Ashland Inc (ASH) is the spin off of its Valvoline business, which is expected to listed on the New York Stock Exchange under the ticker of VVV with Bank of America Corp (BAC), Citigroup Inc (C) and Morgan Stanley (MS) underwriting.
It’s been a long time in the making, as Valvoline’s roots go back 150 years when Dr. John Ellis discovered the lubrication qualities of crude oil.
But of course, the game changer was the introduction of the Model T from Ford Motor Company (F), which used Valvoline.
Yet, the company did not rest on its laurels. Over the decades, Valvoline has continued to innovate, introducing formulas for racing, new synthetic blends (like DuraBlend and MaxLife) and recycled motor oils.
So what might investors expect? Let’s dive into the auto business.
Valvoline: A Well-Oiled Machine
As of now, the company has built a massive footprint, which spans channels like retail and e-commerce. Besides its own chain of close to 1,050 locations, there is also distribution across more than 30,000 retail outlets — such as AutoZone, Inc. (AZO), O’Reilly Automotive Inc (ORLY) and Advance Auto Parts, Inc. (AAP) — and over 12,000 installer locations.
What’s more, the business has remained a nice cash generator. During fiscal 2015, Valvoline cranked out $422 million in adjusted Ebitda on revenues of $2 billion. These kinds of numbers should get drum up excitement for Valvoline’s initial public offering.
Now, it’s true that the company’s revenues have been, well, stuck in neutral. But then again, independence from Ashland should give the company more flexibility to pursue growth strategies.
For example, Valvoline may ramp its dealmaking, as the “quick lube” market is highly fragmented, with 9,000 stores in the U.S. International markets hold opportunities as well, especially in China, India and parts of Latin America. So far, Valvoline gets only about 26% of sales from overseas.
Something else: The company has been implementing new systems to boost the productivity of its current locations. For example, Valvoline has built its own point-of-sale platform that allows for better direct marketing as well as cross-selling/up-selling opportunities, which has resulted in higher ticket sizes ($53.22 in 2007 to $69.07 by 2015).
Bottom Line on the Valvoline IPO
The category for auto retailers and suppliers has provided nice profit-making opportunities for investors. During the past year, WD-40 Company (WDFC) has gained about 32% and ORLY is up about 18%. Oh, and there was also the buyout of Pep Boys, which involved a bidding war between billionaire investor Carl Icahn and Bridgestone Corp (ADR) (BRDCY).
Although, in terms of when VVV shares will hit the market, it is likely to happen during the fall. After all, spinoffs can be extremely complicated.
But it should be worth the wait. Again, Valvoline has a high-margin business as well as the potential to pump up growth.
Besides, given the economic uncertainties and the treacherous risks of highfliers — like LendingClub Corp (LC) and GoPro Inc (GPRO) — a fairly stable operator may be a very attractive choice for investors.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
