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Actionable news in PAH: PLATFORM SPECIALTY PRODUCTS CORPORATION,

Public investors paying less per share than the company spent to create the platform via M&A and Equity Issuances

Public investors have the opportunity to pay $12.73 per share for approximately $14.97-17.56 of value, with upside to above $21 per share.

Global successful investors, such as Pershing Square, Permira, Cevian, Blue Ridge, Corvex, amongst others, hold 42% of PAH at a cost basis above the current price.

The PAH executive and management team own 16% of PAH and acquired nearly $12mm of shares in the open market at $17.81 per share.

Since October 2013, Platform Specialty Products (NYSE:PAH) spent approximately $9.5bn in cash and shares to acquire several businesses, with total equity funding of $3.9bn. The $9.5bn spent translates to roughly $17.56 per share, or a 38% premium to the current price, while the total equity (issued) funding (pro forma for Alent (OTC:ALNXF) and all the dilutive shares) translates to $14.97 per share, or an 18% premium to the current price. Public investors have the opportunity to pay $12.73 per share for roughly $14.97-17.56 of value, which could be worth $21.23.

Public shareholders also have the opportunity to buy shares of PAH for significantly less than what best-in-class investors have paid. Not only do the company's founders and management team own 16% of PAH, but they also acquired nearly $12mm of new PAH shares in the open market at the end of August 2015 at an implied price of $17.81. Permira (Private Equity) obtained nearly 9% of PAH in the sale of its Arysta business in 2014, at a price of $27.14 per share. Cevian Capital should receive approximately 7% of PAH in the sale of Alent, at a price of $25.14. Pershing Square and Blue Ridge Capital acquired 9.4mm and 2.5mm shares in November 2014 at $25.59 per share.

The market estimates the total number of PAH shares at 211mm, as per the company's SEC filings; however, PAH has a significant number of additional share classes, which drives a real dilutive total number of shares to an estimated 262mm (PF Alent). In addition, PAH's net leverage of 5.5x-6.0x is significantly above its target of 4.5x, which could lead to a share issuance to reduce leverage.

The current number of total outstanding shares will also likely significantly increase over time as a result of the unique and innovative Series A Preferred Paid in Kind incentive scheme awarded to the co-founders. Ordinary public shareholders could be diluted by approximately 5% a year as a result of the incentive plan. However, the previous year's "hurdle" share price was $22.85, a significant premium to the current price.

While it is difficult to forecast the 2015, 2016 or 2017 PAH operations, the executives and the management business plan is clear, consistent and proven: Re-investing capital in historically proven industries and historically proven market leaders as quickly as possible to grow free cash flow and earnings in a value-accretive fashion. There are numerous potential risks surrounding the indebtedness, which likely drives a significant number of public market equity investors away. However, the businesses have historically exhibited the ability to operate with leverage, and the leverage covenants are very much tilted in PAH's favor (19 adjustments to EBITDA for net leverage covenant, at least one of which is at management's discretion).

Buy PAH shares below $13 per share.

Valuation Considerations:

PAH is the summation of several M&A transactions. As a result, we explore the net asset value per share, based on the M&A and the total sources of funds:

Source: PAH presentations, press releases and public SEC filings

The company spent approximately $9.5bn on M&A of which $7.9bn was funded using debt.

Since the IPO, PAH has issued 211mm shares (excludes Permira Arysta shares, Alent shares to be issued, PDH shares and founder series A Preferred shares) for a total of $2.8bn, representing an implied blended price of $13.05, or a 3% premium to the current share price.

Adding back the Permira Arysta Preferred B shares, the Alent shares, the PDH shares and the Series A Preferred Shares yields a total diluted share count of 262mm. The proceeds associated with the shares is $1.2bn, for total equity sources of funds for PAH of $3.9bn. The $3.9bn of equity proceeds divided by the 262mm total diluted number of shares implies a blended total equity value per share of $14.97, or an 18% premium to the current share price.

Source: PAH presentations, press releases and public SEC filings

The 211mm shares do not include the original founder shares, the PDH MacDermid shares, the Permira Series B Preferred shares or the equity which should be issued to Alent. Including the additional shares leads to a total share count of 262mm and a blended price of $14.97 per share.

The blended total share PAH share issuance price is $14.97.

At the current market price, public investors are:

1) Purchasing shares in PAH at a 15% discount to the total blended issue price for all currently issued outstanding PAH shares PF for Alent and all the dilutive shares;

2) Purchasing shares in PAH at a 50% discount to the value of the shares issued in the Alent transaction (approximately 54mm shares issued at $25.76 per share) currently ongoing;

3) Purchasing shares in PAH at more than a 50% discount to the value of the shares issued to Permira (premier Private Equity business) in the Arysta transaction (Permira received approximately 22mm Class Series B Preferred shares valued at $27.14 per share); and

4) Purchasing shares at nearly a 50% discount to what key investors paid in the last 12 months.

The left-hand side table below calculates the total shares, starting with the Q2 2015 reported number, and highlights the dilutive shares. The right-hand side table highlights the share count used by an estimate of the public markets.

Source: PAH presentations, press releases, public SEC Filings and additional materials

Given that the equity instruments would be dilutive in an M&A transaction, public market shareholders should include all of the shares in calculating the intrinsic value per share of PAH.

In addition to the current share count, public investors today need to consider the risk of PAH executing a rights issuance or alternative share issuance to reduce its debt burden, which is significantly above its target net leverage and relatively close to its term loan maximum net leverage covenant.

The table below reviews the various EBITDA figures provided by the company, the current leverage and the impact of reducing current leverage to the target leverage via a share issuance.

Source: Proprietary analysis

The 3 EBITDA numbers are estimated: (1) $814mm was the pro forma 2014 EBITDA as per the company's investor presentation regarding the Alent transaction, excluding OMG and excluding all synergies; (2) the $773mm is an estimate based on the devaluation of the Brazilian real to the USD (PAH has significant operations in Brazil); and, (3) $842mm was the pro forma 2014 EBITDA as per the September 2015 PAH presentation, including OMG but excluding all synergies. Assuming the $814mm EBITDA would yield a 6.0x Net Leverage ratio, which would require PAH to reduce net leverage by 1.5x, or $1,241mm, to reach its net leverage target. Assuming a share price of $12 or $18 would imply PAH would need to raise between 103mm and 69mm shares.

In its October 7, 2015 press release, the company highlighted that including the reduction in the pro forma EBITDA, the net leverage ratio would fall somewhere between 5.6x and 5.8x.

Starting with the total sources of funding (debt and equity) of $11.7bn or the total M&A spend of $9.5bn, we calculate the implied equity value based on either not issuing any shares or issuing the two share amounts (103mm or 69mm) in the analysis above.

Source: Proprietary analysis

Assuming no equity issuance implies a PAH value per share of $26.11 based on the total funding, or $17.56 based on the M&A spend. Assuming the total sources of funding as the starting value and a new equity raise at either $12 (Low P) or $18 (High P) per share yields an implied value of $22.11-24.42. Assuming the total M&A spend as the starting value and a new equity raise at either $12 (Low P) or $18 (High P) per share yields an implied value of $15.99-17.65.

However, it is possible that the total sources of funding or the $9.5bn of total M&A spend is not the correct way to think about value; after all, PAH could significantly impair its assets (i.e., have overpaid for acquired assets).

The table below examines the PAH valuation in a highly negative scenario, assuming: (1) The discounted 2014 PF EBITDA, excluding synergies of $773mm; (2) the management-estimated 2014 PF EBITDA, excluding synergies of $814mm; (3) the management-estimated 2014 PR EBITDA, including synergies of $842mm; (4) historical low EBITDA multiple of 9.0x; (5) the implied PAH EBITDA multiple based on the $814mm of EBITDA at the current price of 9.7x; (6) the blended M&A EBITDA multiple paid by PAH of 11.9x; and (7) PAH executing a share issuance at $12 per share to reduce debt (we highly doubt the company would issue shares at $12, given the buy-in price of several shareholders and the potential for such shareholders to provide PAH with short-term funding to pay down the debt and stay within the debt covenants).

Source: Proprietary analysis

The most negative case using the discounted EBITDA (without synergies) and multiple would yield a value per share of $9.03, or a discount of 29% to the current price. Adding back 100% of the synergies would yield a value per share of $12.72, or approximately breakeven at today's price.

The second most negative case using the PF 2014 EBITDA ex-synergies and the discounted multiple would yield a value per share of $10.03, or a 21% discount to the current price. Adding back the synergies would yield an 8% premium to the current price.

None of our cases assume any organic growth. The acquisition synergies, if achieved, should deliver between $4 and $5 per share, representing between 30% and 40% shareholder return. Should PAH achieve 100% of synergies, all of our cases yield a positive investment return.

Additional data points which are of interest:

  1. The Arysta acquisition presentation: PAH forecasted $134mm and $155mm of Net Income contribution (from Arysta to PAH) in 2015 and 2016 respectively. The recent reduced guidance heavily driven by the AgroSolutions business and the two forecasts will be significantly lower in the near term; however, even achieving 50% of the earnings would deliver approximately $4 per share of value;
  2. In the Arysta acquisition presentation, PAH forecasted $300mm-330mm of EBIT contribution; and,
  3. Chemtura AgroSolutions (CAS), in 2011 and 2013, forecast significant long-term growth (estimated nearly doubling the revenue in 5 years).

It's likely that the current price provides a significant margin of safety to public investors investing in PAH today at below a price of $13 per share. Given the timing of the synergies and the potential negative near-term news (rights issuance, further Brazilian real devaluation, etc...), the near-term public share price of PAH could move significantly (up and down), but giving management the chance to integrate the business over the next two years should deliver significant value above the current price.

PAH Overview (as of October 2015):

PAH is a highly levered, cash-on-cash return focused business driven by M&A and attractive end markets in businesses that operate on several core principles that are industry agnostic. Management highlights its paramount focus is increasing the "intrinsic value per share" (although there is no use of intrinsic value per share in the executive incentive compensation).

Management highlights that it operates businesses which have:

1) Over 5-8% year-on-year organic revenue growth;

2) Opportunities to drive free cash flow growth above organic growth;

a. 10% long-term Net Income growth rate.

i. CEO Mr. Leever has noted he would actually target 20% long-term Net Income CAGR, but would also seek 30%.

b. Bolt-on acquisitions operating in PAH industries will generate EBITDA synergies of 25-50% of the target underlying EBITDA.

3) Market leading (#1 or #2) products;

4) Limited capex investment to generate organic growth (less than 3% - "Asset Lite");

5) High EBITDA to Free Cash Flow conversion (north of 85%);

6) Limited fixed costs (i.e., "Asset Lite");

7) High SG&A costs at over 20% of sales (partly driven by R&D representing the "High Touch" and the Moat);

8) Industry-leading returns on invested capital; and

9) Long operating history with deep customer relationships, where people and technology act as a moat.

The PAH management team highlights that it targets a long-term 4.5x net leverage multiple, which, according to management, should translate to slightly below investment-grade. In addition, the company does not intend to reduce the total quantum of debt, but rather to increase the EBITDA primarily through acquisitions and organic growth. The sizable interest expense should, in theory, be paid down by the highly cash flow-generative operations. During the March 2015 Investor Day, management spoke about running the MacDermid and Arysta businesses (separately) at over 7x net debt-to-EBITDA at various points in time as private entities.

One of the key drivers to PAH's acquisition plan is taking companies that have low leverage and adding leverage to those operations. For example, when the company acquired Alent in 2015, Alent had 1x net debt-to-EBITDA, and its credit covenants highlighted a maximum net leverage ratio of 3.0x. PAH's 4.5x leverage target theoretically would have allowed it to add $595mm of net leverage onto Alent immediately and reduce the equity portion of the investment. However, the company managed to obtain credit financing of $1.9bn - nearly 10x Alent's EBITDA, or an incremental 9x net leverage relative to standalone Alent. The implied funding split is 80% / 20% debt / equity.

While PAH has clearly stated that it's not a publicly traded LBO, the only reason it should not be compared to a Private Equity LBO business is because of the longer-term time horizon, the dedication to not selling assets and the planned re-investment of 100% of the free cash flow to growth, rather than any allocation to paying down debt or cash dividends.

The chart below highlights the breakdown of the company's revenue by geography and EBITDA (excluding synergies) by division:

Source: PAH presentations

PAH has a balanced geographical presence between North America, Latin America, Europe, AIME (Africa, India, Middle East, and Asia) and a near 50 / 50 split between the AgroSolutions (53%) and Performance Applications EBITDA.

PAH's Indebtedness:

The company's indebtedness should be a concern for all public equity investors. given the high level of indebtedness that PAH intends to run, 4.5x net leverage target. In a transaction-heavy business, failure to accurately forecast the EBITDA could have dramatic impacts. From a public equity investor perspective, PAH covenants are very light and friendly. The Net Leverage covenant is 6.5x (term loans). Moody's assigned PAH debt an overall "covenant quality score" of 4.15 on a scale of 1 to 5, with 1.0 being the strongest and 5.0 the weakest. The US average score is 3.61. The EBITDA used in the covenant ratio has approximately 19 adjustments, one of which is a synergy estimate which is at the discretion of management.

In October 2015, the company announced the reduction of the EBITDA from $620-650mm to $550-570mm. In March 2015, PAH had forecast a 2015 EBITDA range of $660-680. The management team has reduced the 2015 EBITDA forecast by nearly 20% in only 6 months, and only approximately 12 months after completing the acquisitions which deliver such EBITDA. To-date, PAH has not impaired the goodwill or the intangible assets on its balance sheet.

Simultaneous to the EBITDA reduction, PAH highlighted that pro forma for the OM and the Alent transaction, the net leverage multiple would be between 5.6x and 5.8x.

Source: PAH Presentations and Estimates

The left-hand side table highlights the PAH debt as of Q1 2015, Q2 2015 and Q2 2015 plus OM (which should close before FY 2015), and Q2 plus OM plus Alent ($4.7bn).

The right-hand side table highlights the PAH EBITDA by division. The two left-hand side columns represent total PF consolidated estimated EBITDA, including synergies for 2013 and 2014. The 2015 Consolidation columns represent the estimated amount of operations consolidated in 2015 (Arysta closed in mid-February 2015, and Alent and OM will also represent limited-to-no earnings in 2015). The % change to the 2014 column estimates the change in EBITDA in 2015 relative to 2014. The Agricultural division is estimated to be the primary driver of the decline, based on the October press release and the decline in the Brazilian real versus the USD. The reported 2015E number is the $550mm low end of the new PAH range. Thereafter, the 100% PF 2015E column adds back the OM and Alent EBITDA as well as the synergies provided by the October press release, to yield an EBITDA of $841mm.

The estimates yield the 5.6x net leverage, which is the low end of the October press release range of 5.6x-5.8x.

PAH Shareholders:

The company has a concentrated strong value creative shareholder base controlling a majority of the total shares. PAH executives also own a significant amount of the company, and are highly incentivized to create value.

Source: Corvex SEC filing August 2015, Blue Ridge PAH Proxy 2015, TOMS PAH Proxy, Amici PAH Proxy, Wellington PAH Proxy 2015, Pershing Square SEC filing August 2015, Mr. Berggruen PAH Proxy 2015, Mariposa PAH Proxy 2015, Mr. Leever PAH Proxy 2015, Permira PAH Proxy 2015

Both of PAH's co-founders, Mr. Nicolas Berggruen and Mr. Martin Franklin, currently own more than 6% of the company. In addition, both have the "founders' shares" Series A Preferred stock, which can be issued every year based on PAH's share price performance. In several growth scenarios, the founders could obtain the equivalent of 2-5% of PAH shares. Mr. Daniel Leever, the CEO of PAH, also holds a significant stake in the company, having rolled in his MacDermid equity into PAH. In addition, the MacDermid senior management team rolled up their MacDermid shares into PAH instead of cashing out when PAH acquired MacDermid. The executive and management teams control approximately 16% of the business.

In addition, at the end of August 2015, several of the key executives acquired the company's shares in the open market:

  1. Mr. Berggruen acquired an additional 224,100 shares for $4mm, at an implied price of $17.81.
  2. Mr. Franklin acquired an additional 448,200 shares for $8mm, at an implied price of $17.81.
  3. Mr. Ben Gliklich (COO) acquired 4,760 shares for $100,000, at an implied price of $20.80.

Pershing Square is a publicly traded $13bn global long / short equity value investment fund run by Mr. Bill Ackman. Pershing runs a highly concentrated portfolio, where currently approximately 7 investments represent 90% of the portfolio. The fund obtained a 33% stake (worth approximately $635mm) when PAH was an LSE publicly traded company without any operating businesses. In other words, Pershing invested in Mr. Franklin and Mr. Berggruen and their ability to find and acquire companies with specific operating characteristics across any industry. The fund has a historical relationship with Mr. Franklin, working together in the "Justice Holdings" entity, which acquired, ran and sold Burger King. Pershing also currently invested in Nomad Foods (Mr. Franklin's other SPAV).

In May 2015, Pershing presented an investment thesis regarding PAH at the Ira Sohn conference, which highlighted:

1) "Businesses managed by superior operators that execute value-enhancing acquisitions and shareholder-focused capital allocation have substantial Platform Value";

2) "Franklin's intense focus on value creating capital allocation has driven significant share price appreciation across several companies";

3) "Value-creating acquisition and capital allocation strategy

a. Maintains high standards for quality and valuation of acquired businesses

b. Focus on shareholder value creation not reported GAAP earnings

c. Intelligent use of debt and equity to finance acquisitions

d. Capital allocation and acquisitions are a core competency and a significant focus of senior management and the board

4) A decentralized organization structure allows Franklin's companies to move quickly to seize opportunities to keep costs down."

- Source: Pershing Square Presentation titled 45x presented at May 2015 Ira Sohn Conference

Pershing acquired its initial stake in PAH in 2013, and also very likely exercised all of its original PAH warrants at the end of 2013 and early 2014. We estimate that the fund's cost base for the initial 31% stake (initial shares and warrants) was $10.76. In November 2014, PAH issued additional shares to help fund the Arysta acquisition, and Pershing acquired approximately 9mm additional shares at $25.59 per share. The total Pershing cost basis for the investment in PAH is likely around $14.02 per share.

Permira is a global multi-billion dollar private equity firm with a 30-year history. In October 2007, it acquired Arysta LifeScience, and thereafter, owned and ran the business. While PAH acquired Arysta at the end of 2014 (closed February 2015), Permira did not "sell" or "cash out" its ownership value. It accepted $600mm in Series B Preferred PAH shares valued at $27.14 per share. In other words, Permira exchanged its ownership in pure play Arysta for an ownership in the diversified PAH alongside Mr. Franklin.

Cevian is the leading Europe-based activist equity investor. It manages over $14bn, and is founded and managed by Christer Gardell. Cevian targets good companies that are out of favor and underperforming their potential. It runs a concentrated portfolio of approximately 14 investments and sits on the Boards of 10 of the investments. The target investment return is 100% over 3 years, and Cevian avoids the technology, biotechnology, and pharmaceuticals companies. The estimated Cevian cost basis for PAH shares is $25.14 (the PAH price used for the exchange ratio). We assume that none of the other Alent shareholders voted to take PAH shares which were worth nearly 50% less at the time of the vote than at the time the exchange ratio was set, which would imply that Cevian will own nearly 7% of PAH.

Corvex is an activist hedge fund that holds approximately 40 equity positions, with nearly $9bn under management. It was founded by Mr. Keith Meister in December 2010 after he worked with Mr. Carl Icahn for 7 years. Corvex initially disclosed a position (6.4mm shares) in PAH in February 2015 (for the quarterly period ended December 31, 2014). The...


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