Arxada: "Money good", but is there sufficient relative value given macro risks?
- Jovan
- Jan 9, 2023
- 2 min read
Investment Highlights
Leading global positions in several niche end markets, many with barriers to entry and secular growth trends
Strong product portfolio of registered actives and regulatory assurance capabilities
Strong R&D capabilities with large pipeline of new products
Global manufacturing footprint in close proximity to diversified customer base
High, stable gross margins via pass throughs mechanisms or pricing power leading to strong cash generation
Adequate short-term liquidity of c. CHF 370m with long dated maturity profile
Experienced management team led by Marc Doyle PhD, former CEO of Dupont and former COO of Specialty Products division and Peter Frauenknecht, CFO, former CFO of successful carve-out Atotech Group
Well capitalized Tier 1 sponsors with chemicals expertise and solid track record of executing carve-outs and realizing synergies from bolt-ons
Risks & Mitigants
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GOOD business with BAD balance sheet facing TEMPORARY macro headwinds. LOW refinancing risk given business profile and long dates maturities...
...but SIGNIFICANT capital depreciation risk remains. On balance, INADEQUATE risk-adjusted return on a relative value basis for LARGE INVESTMENT at this time.
Recommendation
Given macro headwinds and relatively low yields, recommend to be UNDERWEIGHT in single B chemicals. However, if necessary for portfolio diversification...
... and revisit in the future depending on their financial and instrument trading performance.
Illustrative Future Scale Investment Scenario
Background
On July 1, 2021, Bain Capital & Cinven carved out Arxada (formerly Lonza Specialty Ingredients), a global anti-microbial and specialty chemicals company, from Swiss chemicals company Lonza at an EV of c. CHF 4.2bn (9.6x FY20 PF adj. EBITDA)
The transaction was funded by c. CHF 2.7bn in capital markets debt (6.2x leverage/5.0x senior secured) and c. CHF 1.5bn (36%) in sponsor equity
CFR is currently B3/B
CHF 71m in synergies (c.80% COGS) are expected to be realized by FY22 with CHF 52m realized as at Q3 FY 22
In December 2021, the company rolled up Enviro Tech (food, beverage and water protection) and Troy (industrial anti-microbial products) for $670m and $450m respectively
Their combined FY21 PF EBITDA was CHF 70m
The acquisitions were primarily funded by CHF 720m debt and rolled management equity
c. CHF 60m in synergies (primarily SG&A) are expected to be realized by FY23
In spite of acquired EBITDA, total leverage has increased to the Q3 FY 22 level of 6.5x (5.4x senior secured)
Company Profile
Recent Developments
Ownership & Management
Industry Summary
Historical Financial Performance
Current Trading (Q3 FY22)
Projections
Base Case
Break Case
Relative Value
Leveraged Loans:
High Yield:
Appendix
Valuation (Break Case)
Corporate Structure
Interesting. A couple of points:
- I'd run valuation on EBITDA less maint Capex (maybe conclusions won't change but I'd look at it that way).
- Business is large, diversified, with 2 large sponsors behind it. In the break case CHF 50m of cash would not be an issue.
- It seems that they have track record in realising cost savings YTD so the EBITDA of CHF 516m is credible; would be good to see if there are any other adjustments which would not be possible to carry forward in a refinancing with current docs (eg revenue synergies)
- The risk of gas prices skyrocketing again and impacting production of fertilisers / chemicals remain (unless not an issue for Arxada…