Post Holdings Annual Report 2013

So it's been a while since my last post (no pun intended).  I didn't mean take any time off. December was a busy month with some travelling, holidays and things like that (shopping etc.).  But I intend to keep posting here as before.  I know most blogs tend to peter out after a year or two, but I have no intention of slowing down here.  But I will only post when I think I have something meaningful to say.

It's a new year and this is the time that we all can't wait for the full year results to be announced to update our thoughts on various companies.  And of course, my favorite time of year is when all the annual reports start coming out.

Anyway, one recent idea that I really like, Post Holdings (POST) did come out with their annual report in December as their year ended in September 2013.

It's a well-written annual report by the outsider CEO, Bill Stiritz.  He explains his plan for POST going forward.  Here are some snips:

This is a quote in the beginning of the report from Shakespeare's Julius Caesar:

There is a tide in the affairs of men, which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries.  On such a full sea are we now afloat.  And we must take the current when it serves, or lose our ventures. 

This points to the opportunity Stiritz sees for POST. One of those areas is organic food.



Sales of organic food in the U.S. has grown around 18%/year since 1990 according to this figure (to the right).  That's a pretty big tide.  I've always been a fan of companies like Trader Joe's and Whole Foods and do feel that this trend will continue for some time.  The opening of Whole Foods and Trader Joe's in a neighborhood tends to increase demand for organic foods overall even at the crappy local supermarket.  In the neighborhood where I live this has happened too. Once a Fairways, Trader Joe's and Whole Foods opens, the local supermarket chain seems to increase shelf space for organics and higher quality foods to try to hold on to their customers.

So getting into the organic food business is sort of like selling pans and shovels in a gold rush Samuel Brannan-like. The big chains, local chains, mom and pops, convenience stores will all fight each other for market share, but it will increase the demand overall for organics as the crappier stores try to improve their product lineup.

Anyway, that's just my pedestrian observation.  I am seeing it happen around here and other neighborhoods.

Holding Company
Here is Stiritz explaining the concept of Post Holdings as a holding company:

Unlike other companies that do acquisitions to build empires, Stiritz will focus on "strategic portfolio management".  I think some companies focus on synergies as that's one way (or the only way) to justify their empire-building.  Stiritz is clearly focused on strategic portfolio management to create shareholder value.

It is relatively unique for a company to be this hybrid, public company/private equity fund entity.  But it's not completely unique.  This blog likes to focus on companies like that.

The other difference between POST and a private equity fund is that POST is investing with permanent capital whereas private equity funds have an exit date in mind when they enter a purchase transaction; at some point there needs to be a liquidity event to return capital to fund investors upon expiration of the fund.  POST doesn't have that problem (similar to Berkshire Hathaway and other Berkalikes).

Valuation
So if you just look at the headline valuation measures, POST looks a little expensive.  For example, the EV/EBITDA on a trailing twelve month basis is 12.9x according to Yahoo Finance.  That's not cheap.   Well, General Mills is trading at 11x and Kellogg at 13x, so it's not totally out of whack for a 'cereal' company.

But this 12.9x EV/EBITDA is not reflective of the true value because POST did some acquistions last year boosting EV but the EBITDA hasn't kicked in for the full year.

POST expects adjusted EBITDA for the fiscal year 2014 to be in the range of $245-260 million.  Against the current EV of $2.6 billion, that's an EV/EBITDA of 10-10.6x.   The $245-260 million outlook includes only acquisitions completed through September 2013, and the EV reflects the September 2013 balance sheet (and current stock price at around $51/share).  There has been a $525 million senior debt offering and $300 million convertible preferred stock offering since then, and the  Dakota Growers acquisition that just closed.

Dakota Growers was bought for $300 million and is expected to add $42-46 million in EBITDA on a full year basis.

Either way, the 10-10.6x range looks within the range of other cereal companies.  Yes, of course, you notice that I am comparing trailing twelve month for comps versus forecast, forward EBITDA for POST.  But given that this industry doesn't grow much, it should be close enough.   

But of course, this is not just another cereal company as we know.  This is an outsider CEO company!  If you don't know what I'm talking about, here is the link to the outsider CEOs post.   And here is my original POST post.

Book Value

I don't really look at food companies on a book value basis.  Or at least not directly in valuation.  We all do to the extent that we look at return on equity, which of course, is based on book value. 

But in this case, book value seems to provide a valuation data point.  Much of POST's book value is in goodwill, and this goodwill was created by Ralcorp's purchase of POST back in August 2008, so it's a recent figure.  Also, the goodwill is tested for impairment every year.   

But still, these management estimates are not to be taken too seriously even if the CEO is Stiritz. These 'models' (discount cash flow etc...) can be flakey, but at least it can be a datapoint. 

Book value per share of POST as of September 2013 was $45.83, so POST is trading at around 1.1x BPS. 

Here is the cut and paste of the goodwill valuation from the POST 10-K.  Again, I wouldn't lean on this valuation too hard, but it is a datapoint: 

Goodwill - Goodwill represents the excess of the cost of acquired businesses over the fair market value of their identifiable net assets. In the fourth quarter of fiscal 2011, we adopted ASU No. 2011-8 “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” We conduct a goodwill impairment qualitative assessment during the fourth quarter of each fiscal year following the annual forecasting process, or more frequently if facts and circumstances indicate that goodwill may be impaired. The goodwill impairment qualitative assessment requires us to perform an assessment to determine if it is more likely than not that the fair value of the business is less than its carrying amount. The qualitative assessment considers various factors, including the macroeconomic environment, industry and market specific conditions, financial performance, cost impacts, and issues or events specific to the business. If adverse qualitative trends are identified that could negatively impact the fair value of the business, we perform a “step one” goodwill impairment test. For fiscal 2013, we determined that our recent history of goodwill impairment combined with limited fair value excesses in prior valuations were significant qualitative factors which required us to complete the “step one” goodwill impairment test for our Post Foods reporting unit. We also concluded that “step one” goodwill impairment tests were warranted for our Attune Foods and Active Nutrition reporting units because of the recency of acquisition of those reporting units during the current fiscal year. The “step one” goodwill impairment test requires us to estimate the fair value of our reporting units and certain assets and liabilities. The estimated fair values were determined using a combined income and market approach with a greater weighting on the income approach (75% of the calculation for Post Foods and Attune Foods and 100% of the calculation for Active Nutrition). The income approach is based on discounted future cash flows and requires significant assumptions, including estimates regarding future revenue, profitability, and capital requirements. The market approach (25% of the calculation for Post Foods and Attune Foods and 0% for Active Nutrition) is based on a market multiple (revenue and EBITDA which stands for earnings before interest, income taxes, depreciation, and amortization) and requires an estimate of appropriate multiples based on market data.

As of September 30, 2013, we had goodwill balances of $1,366.3 million, $75.1 million and $48.3 million in our Post Foods, Attune Foods and Active Nutrition reporting units, respectively. For the calculation of fair value of our reporting units, we used the following key assumptions:

		Post Foods		Attune Foods		Active Nutrition
Future revenue growth		2.4% - 9.0%		3.0% - 4.5%		2.9% - 20.5%
Terminal revenue growth rate		3.0%		3.0%		3.0%
Discount rate		9.5%		11.0%		14.5%
EBITDA multiple for market approach:
	Fiscal 2014	10.2x		9.0x		n/a
	Fiscal 2015	9.0x		8.0x		n/a
Revenue multiple for market approach:
	Fiscal 2014	2.3x		1.9x		n/a
	Fiscal 2015	2.1x		1.8x		n/a

Revenue growth assumptions (along with profitability and cash flow assumptions) were based on historical trends for the reporting units and management's expectations for future growth. The discount rates were based on a weighted average cost of capital utilizing industry market data of businesses similar to the reporting units. For the market approach, we used estimated EBITDA and revenue multiples as listed in the table above for Post Foods and Attune Foods based on industry market data. For the Active Nutrition reporting unit, we did not use the market approach because we concluded that the selected industry market data was not consistent with a business with the near term growth expectations of the Active Nutrition reporting unit. An unfavorable change in forecasted operating results and cash flows, an increase in discount rates based on changes in cost of capital (interest rates, etc.), or a decline in industry market EBITDA and revenue multiples for any of our reporting units may reduce the estimated reporting unit fair value below carrying value and would possibly result in the recognition of a goodwill impairment loss. The table below provides sensitivities for certain key variables in our goodwill impairment analysis for each of our reporting units. In all cases, the table presents the amount of change in each respective variable, holding all other variables constant, that would have resulted in an indication of potential impairment for the respective reporting unit. Changes equal to or greater than the amounts reflected in the table would have resulted in a failure of step one of the test and would have resulted in a step two analysis to determine the amount of any impairment.

		Post Foods		Attune Foods		Active Nutrition
Discount rate		increase 0.90%		increase 1.05%		increase 0.65%
Revenue growth rate		decrease 0.90%		decrease 1.00%		decrease 0.70%
Revenue multiple		decrease 0.45x		decrease 0.30x		n/a
EBITDA multiple		decrease 1.75x		decrease 1.30x		n/a

The above doesn't mean that the goodwill is worth the balance sheet value. But it does mean that it's within range where an impairment wouldn't have to be taken.  For example, an EBITDA multiple change of 1.75x is pretty big versus a 10x base; that would be an almost 20% valuation change.

But it also means that goodwill is not totally worthless.

Precedent Transactions Analysis Valuation

And it occured to me that Ralcorp was purchased by Conagra right after POST was spun off, and I would hate to see the hard and expensive work of investment bankers putting together the deal go to waste so I decided to recycle their work here. 

There really is no 'comp' for POST, but it's a food company and so was Ralcorp.    There often isn't a perfect fit for comparing valuations, but it doesn't hurt to take a look at what food company deal valuations have been like in the recent past.  

This is from the December 2012 merger proxy, so it's pretty 'fresh'.  Here's what the bankers dug up: 

Selected Precedent Transactions Analysis.

Ralcorp’s financial advisors analyzed certain publicly available information relating to transactions in the packaged food industry since 2006. Specifically, Ralcorp’s financial advisors reviewed the following transactions:

Acquiror		Target		Date Announced
Selected Branded Food Transactions
Campbell Soup Company		Wm. Bolthouse Farms Inc.		July 2012
Kellogg Company		Pringles (Procter & Gamble Co.)		February 2012
KKR & Co. L.P., Vestar Capital Partners, Centerview Partners		Del Monte Foods Company		November 2010
Grupo Bimbo S.A.B. de C.V.		Sara Lee Corp.’s North American Fresh Bakery Business		November 2010
The Carlyle Group L.P.		NBTY, Inc.		July 2010
Nestlé S.A.		Kraft Foods Inc.’s Frozen-Pizza Business		January 2010
Pinnacle Foods Group LLC		Birds Eye Foods LLC		November 2009
Grupo Bimbo S.A.B. de C.V.		George Weston Limited’s Northwestern U.S. Bakery Business		December 2008
SOS Corporacion Alimentaria S.A.		Bertolli (Unilever Plc)		July 2008
The J.M. Smucker Company		Folgers (Procter & Gamble Co.)		June 2008
Ralcorp		Post Cereals (Kraft Foods Inc.)		November 2007
The Blackstone Group L.P.		Pinnacle Foods Group Inc.		February 2007
Selected Private Label / Food Service Transactions
The J.M. Smucker Company		Sara Lee Corp.’s North American Foodservice Coffee and Beverage Business		October 2011
Ralcorp		Sara Lee Corp.’s North American Refrigerated Dough Business		August 2011
Lassonde Industries Inc.		Clement Pappas and Company, Inc.		June 2011
TreeHouse Foods, Inc.		S.T. Specialty Foods, Inc.		September 2010
Cott Corporation		Cliffstar Corporation		July 2010
Aryzta AG		Fresh Start Bakeries (FSB Global Holdings, Inc.)		June 2010
Ralcorp		American Italian Pasta Company		June 2010
GS Capital Partners		Michael Foods, Inc.		May 2010
Viterra Inc.		Dakota Growers Pasta Company, Inc.		March 2010
CSM N.V.		Best Brands Corp.		February 2010
TreeHouse Foods, Inc.		Sturm Foods, Inc.		December 2009
IAWS Group, plc		Otis Spunkmeyer, Inc.		October 2006

While none of the companies that participated in the selected transactions is directly comparable to Ralcorp and none of the transactions in the selected transactions analysis is directly comparable to the merger, Ralcorp’s financial advisors selected these transactions because each of the target companies in the selected transactions was involved in the packaged food industry and, based on their professional experience and judgment, had operating characteristics and products that for purposes of analysis may be considered similar to certain operating characteristics and products of Ralcorp.

For each of the selected transactions, Ralcorp’s financial advisors calculated and compared the enterprise value of the target company, calculated based on the purchase price paid in the transaction as a multiple of EBITDA of the target company for the latest twelve month (which we refer to as LTM) period ended prior to the announcement of the merger. In addition, Ralcorp’s financial advisors calculated this multiple for Ralcorp based on the value of the merger consideration and using the LTM EBITDA as of September 30, 2012. The following table presents the results of this analysis:

Selected Transactions

Range

Median

Enterprise Value as a Multiple of:

Branded Food

Private Label /   Food Service

Branded     Food

Private Label /   Food Service

Overall Median

Merger (Forecasts)

LTM EBITDA (1)

7.6x-10.6x

5.3x-11.7x

9.0x

7.8x

8.5x

12.1x

(1)	EBITDA multiples for Wm. Bolthouse Farms Inc., Pringles (Procter & Gamble Co.), Kraft Foods Inc.’s Frozen-Pizza Business, Sara Lee Corp.’s North American Refrigerated Dough Business and Cliffstar Corporation excluded value paid for step ups in tax basis.

Because of the inherent differences between Ralcorp and the parties to the selected transactions, Ralcorp’s financial advisors considered differences between the business, financial and operating characteristics and prospects of Ralcorp and the parties to the selected transactions that could affect the values of each. Based on their judgments and experience, informed by the transaction multiples of these selected transactions, Ralcorp’s financial advisors selected a reference range of 8.0x to 10.0x and applied this range to the LTM EBITDA of Ralcorp, resulting in illustrative per share values for Ralcorp common stock ranging from $50.42 to $69.72. 

So the bankers figured Ralcorp was worth between 8-10x EV/EBITDA.   From this (and the above table), it seems like POST is a little on the high side of valuation.  But again, POST is not just any old cereal or food company. 

Conclusion

This is not one of those situations where I can say POST is worth this, and it's trading at some discount to that. It's more like, it's trading at what others are trading at and in a reasonable range, but forward returns may not be so reasonable given the history of the current CEO. 

Stanley Druckenmiller in a TV interview said that Stiritz is the greatest capital allocator of all time.  I think he based this on his study of insider purchase of shares; he had the best timing by far of anyone in the universe they looked at.  Druckenmiller is so impressed with Stiritz as a capital allocator that he bought shares in Herbalife (HLF) without much knowledge of the HLF business.  He said that when someone so good at capital allocation puts so much of his own net worth into a stock, you don't really need to know all that much about the stock. 

I know many people don't think very highly of hedge fund managers, but I have always respected Stanley Druckenmiller, no less than many other of my investment 'heroes'.  His style is a little different than what I have become interested in.  And I don't always agree with what he says (well, I don't always agree with what Munger and Buffett say either).   But he is the real deal.  All the criticism about hedge funds that I hear doesn't apply to Druckenmiller.  He is truly different. 

Anyway, back to POST.  I do sort of wish Stiritiz owned a lot more POST stock; that would really make this a perfect story.  Oh, and if Stiritz was a little younger too.  He is 79.   That's the one 'hole' in this story.  But hey, let's put it this way.  Looking at Munger, Buffett, Icahn, Soros etc...  maybe 80 is the new 50. 

Otherwise, as I said before, it's a great story:

• It's a perfect Greenblatt-type spin-off; a neglected business spun off with renewed focus and incentivized management to turn the business around (in this case, goal is to stabilize legacy business enough to use as a base to expand into new areas).
• It's run not by an outsider-like CEO, but an actual outsider CEO featured in the great book.
• The company is getting into new areas with growth potential; not only industry growth potential (organics, private label), but potential for consolidation (roll-ups).  I've always loved Trader Joe's, but unfortunately you can't buy the stock. And Whole Foods is too expensive (I'm talking about the stock price, but I know what you all are thinking).  Here is a way to get into the trend at a reasonable price.  Private label is also very interesting (Trader Joe's is basically a private label.  Costco's Kirkland is also very interesting.  This is a big trend that will continue for some time. Actually, Costco's Kirkland may be interesting for COST but maybe that will be another post for another day). 

• It is reasonably priced.  There is no "outsider CEO" premium.  The headline EV/EBITDA figure (of close to 13x) is misleading due to one-time reasons.  When the EBITDA from 2013 acquisitions begin to flow through, the valuation will look cheaper.  I know this sounds silly, but the market does often act like this (maybe due to a lot of robots trading off of unadjusted, nominal valuation figures not to mention value investor screens not showing adjusted valuations.  A great example of this 'silliness' is Pzena Investments; when the lousy performance figures of the financial crisis drops off in the five year returns, the performance metrics look better, investor demand rises and the stock goes through the roof.  Pzena said he understands this makes no sense, but assured us that this is how the markets work.  When things 'look' better, people think it's better.)

So anyway, this is a lazy, light post, but I wanted to put something out there.   And even though there isn't much 'meat' in this post, I really do like POST. 

And I do want to keep posting more but I want to resist the temptation of just posting for the sake of posting.  I would rather have a long gap of no posts than have the blog filled with nonsense, like a bunch of rants about one thing or another (who can't write pages and pages of that every day?!).  

Platform Specialty Products

So, someone commented on another outsider-esque investment idea backed by some billionaires.   Platform Acquisition Holdings is another Martin Franklin - Nicolas Burggruen SPAC (special purpose acquisition corporation, otherwise known as a blank check company).   Bill Ackman also owns a stake.

I think this is Ackman's second investment with Franklin - Burggruen.   The first was in Justice Holdings, which ended up buying Burger King and is now listed on the NYSE (and Ackman still owns).  He was a co-founder of Justice, but at Platform he is just an investor; after the relisting on the NYSE, Pershing Square will have a representative on the board.

This is certainly not Twitter, but a new listing to take a look at.

Liberty and Freedom
Franklin - Burggruen had some other SPACs too in the past.  Two of them were U.S. listed; Liberty Acquisition which I suppose we can call a disaster and Freedom Acquisition.  The other one, Liberty Acquisition International was listed (like Justice and Platform) in Europe, so I am not too familiar with that one.

I only looked at the two U.S. listed ones (at the time);  Liberty Acquisition merged with Prisa; I remember reading about it at the time and I wasn't comfortable at all with it as it was an entity in Europe and I had no familiarity with it.  Freedom Acquisition acquired (or merged with) GLG, a hedge fund manager.  I looked at that too and wasn't particularly interested in GLG.

I don't know much about Nicolas Burggruen other than what I read in the press; that he is a homeless billionaire (living in hotel rooms), so I can't say anything about his style or philosophy.

Anyway, I suppose someone might have done an IRR on the above SPACs, but I don't have those handy with me  (But as you will see, even though that is important, I am sort of interested in what Platform just bought).

Martin Franklin is well-known to U.S. investors because of his work at Jarden Corp (JAH).  He sort of does fit the outsider CEO mold (prudent acquisition driven growth).  JAH is certainly a candidate for a post here on this theme I seem to be on here these days.

Martin Franklin took over JAH as Chairman and CEO in September 2001 and now is executive chairman (gave up CEO post in 2011).

For those who don't know him, check this out:

Jarden Corp Stock Price Performance Since September 2001

Returns since September 2001:
                                  
JAH:                           +33.5%/year  (total return)
S&P 500 index:          +4.6%/year  (excluding dividends)
Berkshire Hathaway:  +7.8%/year

Ackman's interest in investing with Martin Franklin is clearly due to his performance at JAH (that's exactly what he said).


Platform Specialty Products
So anyway, the fact that PAH (Platform Acquisition Holdings, listed in London but trading halted due to deal) is a SPAC started by Martin Franklin and Nicolas Burggruen is enough to be interesting.  But I generally don't invest in SPACs, even with reputable founders.  There was a time when it was a free call option; you can buy them at book or a discount and then vote either way on an acquisition; if it is voted down (or you choose to), you can get your cash back.  If not and the acquisition is sweet, then you make money on the pop.  

In fact, the Special Opportunities Fund (SPE) owns a basket of SPACs and SPAC warrants as a sort of cheap option on good acquistions.  It's certainly a good idea, but for me, I just tended to think that this SPAC trade was a sort of pre-crisis thing.   Since it was basically an arbitrage between private market values and public market values, maybe this trade is getting more interesting again; public market valuations are up a lot in the last couple of years.  So maybe this 'pop' will start to come back.  In the past few years, public market prices tended to look cheap and private market prices seems to have gone up due to the private equity boom.

Crumbs and American Apparel are two SPACs that come to mind that have been disasters. I'm sure there have been some great ones, but I'll leave that game to others.  I'm too lazy to find things that pop; I want to find long term places to put my money (of course, owning SPE will give you some of that exposure!).

In any case I did have Platform Acquisition at the back of my mind but it wasn't really a priority for me to look at.  But thanks to a commentor in the POST post (no pun intended), I had to front-burner this because:

The business Platform Acquisition bought might be an outsider CEO company. 

Platform Acquisition, in October (closed in November), bought MacDermid, a specialty chemical company.  They will change the name of Platform Acquisition to Platform Specialty Products and relist on a U.S. stock exchange.

MacDermid an Outsider CEO Company?
MacDermid  was a publicly traded company until 2007 when there was a managment buyout.   The MBO happened at $1.3 billion, or around 9x EV/EBITDA.  The Platform acquisition happened at 10x adjusted EBITDA (at $1.8 billion).  So the valuation looks more or less in line with what management thought it was worth back in 2007 (OK, 9 is not 10, but close enough for the blogoshpere!).

But first, let's look at what raised my eyebrows.  MacDermid is run (and has been run since 1990) by Daniel Leever (65 years old so not young, but not too old either!). 

On the investor conference call when the acquistion was announced, they said that during Daniel Leever's tenure, MacDermid increased revenues five times.  He has been with MacDermid for 34 years and has been CEO for 24 years.  I assume his "tenure" is the time he was CEO.  That's a modest 7%/year in revenue growth; 5x in 24 years = 7%/year. 

They said he increased the value of the company from $80 million to the current $1.8 billion through those years.  So that's +13.9%/year since 1990.  Not bad at all.   I think they said he increased market cap or equity value 30x during his tenure.  Assuming that means 1990-now, that's +15%/year.  This growth includes acquisitions, but no equity raises.

Although pretty good, it's not quite up to par of the original "outsiders".  Here, look:

1.  Tom Murphy (Capital Cities Broadcasting):
    +19.9%/year over 29 years versus +10.1%/year for the S&P 500 index
2.  Henry Singleton (Teledyne):
    +20.3%/year over 27 years versus +8.0%/year for the S&P 500 index
3.  Bill Anders (General Dynamics)
    +23.3%/year over 17 years versus +8.9%/year for the S&P 500 index
4.  John Malone (TCI)
    +30.3%/year over 25 years (up to ATT acquisition) versus +14.3%/year for the S&P 500 index
5.  Katharine Graham (The Washington Post)
    +22.3%/year over 22 years (since IPO) versus 7.4%/year for the S&P 500 index
6.  Bill Stiritz (Ralston Purina)
    +20.0%/year over 19 years versus +14.7%/year for the S&P 500 index
7.  Dick Smith (General Cinema)
    +16.1%/year over 43 years versus +9%/year for the S&P 500 index
8.  Warren Buffett (Berkshire Hathaway)
    +20.7%/year over 46 years (through 2011) versus 9.3% for the S&P 500 index

But then again, these guys are really special.   You're not going to find a lot of these lying around. 

Let's take a quick look at valuation.

Valuation
The MBO of MacDermid happened at around 9x EV/EBITDA.  Since MacDermid was a publicly listed company, you can go to sec.gov and get 10-k's and other filings including the MBO merger proxy from 2007.  I was going to use that proxy for valuation, but there is a more recent proxy from the Solutia acquisition by Eastman in early 2012.  There is probably a more recent acquisition/merger, but this is good enough for comparative transaction analysis.   Since this is not a Conde Naste publication and I don't have free interns working for me, I will do the comparative company analysis myself.

Anyway, here is some info from the Solutia merger proxy (dated May 2012, analysis by Deutche Bank and Moelis):

Date		Bidder		Target		Consideration		Total Enterprise Value ($ billion)
Core Selected Transactions
July 2011		Lonza Group Ltd		Arch Chemicals, Inc.		Cash		1.4
May 2011		Ashland Inc.		International Specialty Products Inc.		Cash		3.2
April 2011		Solvay S.A.		Rhodia S.A.		Cash		7.3
March 2011		Berkshire Hathaway Inc.		The Lubrizol Corporation		Cash		9.6
July 2008		Ashland Inc.		Hercules Inc.		Cash and Stock		3.4
April 2004		The Lubrizol Corporation		Noveon International, Inc.		Cash		1.8
Other Selected Transactions
October 2011		American Securities LLC		Unifrax I LLC		Cash		0.9
July 2011		Ecolab Inc.		Nalco Holding Company		Cash or Stock		8.1
June 2010		BASF SE		Cognis Holding GmbH		Cash		3.2
September 2008		BASF SE		Ciba Holding AG		Cash		5.0
July 2008		The Dow Chemical Company		Rohm and Haas Company		Cash		18.9

Date		Bidder		Target		Consideration		Total Enterprise Value ($ billion)
August 2007		Akzo Nobel N.V.		Imperial Chemical Industries PLC		Cash		10.7
May 2007		Saudi Basic Industries Corporation		GE Plastics business of General Electric Company		Cash		11.6
September 2006		Court Square Capital Partners II, L.P. / Weston Presidio V, L.P. / Management		MacDermid Incorporated		Cash		1.3
September 2006		Apollo Management L.P.		GE Advanced Materials business of General Electric Company		Cash and Stock		3.8
February 2006		BASF SE		Construction Chemicals business of Degussa AG		Cash		3.2
March 2005		Texas Pacific Group		British Vita PLC		Cash		1.3
March 2005		Crompton Corp.		Great Lakes Chemical Corporation		Stock		1.8
February 2005		Cytec Industries Inc.		Surface Specialties business of UCB SA		Cash		1.8
July 2004		Apollo Management		Borden Chemical Inc.		Cash		1.1

With respect to each selected transaction and based on publicly available information, Solutia’s financial advisors calculated the multiples of the target’s total enterprise value to its EBITDA for the twelve-month period prior to announcement of the applicable transaction, which is referred to below as “TEV / LTM EBITDA.”

This analysis indicated the following:

Selected Transactions TEV/LTM EBITDA Multiples

High

Mean

Median

Low

Core Selected Transactions

9.2x

8.3x

8.7x

6.9x

Other Selected Transactions

12.4x

9.3x

9.3x

6.1x

All Transactions

12.4x

9.0x

9.0x

6.1x

So anyway, this analysis includes transactions between 2004 and 2011 so includes a lot of deals.  The core selected group deals were done at a mean of 8.3x EV/LTM EBITDA which looks lower than the current MacDermid deal.  For all transactions, the multiple is 9.0x.  Platform paid 10.0x last twelve months adjusted EBITDA so looks higher than previous deals.

The comparative listed valuations in the 2012 proxy for Solutia is a little dated since the market has done very well since early 2012, so here is my quick update on the listed comps.  I just took the last twelve month figures, EV and things like that from Yahoo Finance.

Publicly Listed Comps (Specialty Chemicals)

This is the same universe of comps that was in the Solutia proxy.  It looks like specialty chemicals trade at around 10x EV/EBITDA, so the deal price is within range of where specialty chemicals trade these days.

But here's the interesting thing.  McDermid is asset-lite and has very little capex; they generate a lot of free cash (sound familiar?).  Here's a slide from their recent presentation:

If they are generating 90 cents of free cash (unlevered, pretax) per $1.00 of EBITDA, then a 10x EV/EBITDA might be pretty cheap.  With 90% cash conversion, then a 10x EV/EBITDA translates into a 11x EV/(EBITDA-Capex).  

The table above shows that EV/(EBITDA-Capex) for specialty chemicals averages 21x.   Average capex to sales is 8% versus less than 2% at MacDermid.   Free cash conversion is only a little over 50% at other specialty chemicals versus over 90% for MacDermid.  So on that basis, it looks like a good deal.

Cumulative Preferreds
MacDermid planned on doing an IPO in 2011 / 2012 so they filed an S1 (and many amendments).  It's a good summary of what MacDermid is about.

One thing jumped out at me that shouldn't be an issue going forward.  As part of the MBO in 2007, they issued payment-in-kind cumulative preferreds shares.  This is from the S1 that shows how much the preferred owners are getting (or accruing):

		Year ended December 31,												Three months ended March 31,
		2011				2010				2009				2012				2011
(amounts in thousands)														(unaudited)
Statement of Operations Data:
Net sales		$	728,773			$	694,333			$	594,153			$	182,195			$	178,521
Cost of sales			388,298				371,223				333,963				95,884				94,980
Gross profit			340,475				323,110				260,190				86,311				83,541
Operating expenses:
Selling, technical and administrative			185,649				179,786				156,508				45,746				45,629
Research and development			22,966				21,005				20,103				6,718				5,359
Amortization			28,578				29,694				29,868				6,655				7,362
Restructuring(1)			896				6,234				4,228				114				(181	)
Impairment charges(2)			46,438				—				68,692				—				—
Total operating expenses			284,527				236,719				279,399				59,233				58,169
Operating profit (loss)			55,948				86,391				(19,209	)			27,078				25,372
Other income (expense):
Interest income			500				696				458				175				108
Interest expense(3)			(54,554	)			(56,196	)			(60,740	)			(13,556	)			(14,088	)
Miscellaneous income (expense)(4)			9,412				15,106				(5,020	)			(4,353	)			(16,172	)
Income (loss) from continuing			11,306				45,997				(84,511	)			9,344				(4,780	)
Income tax (expense) benefit(3)			(9,953	)			(21,723	)			6,427				(4,366	)			(1,145	)
Income (loss) from continuing operations			1,353				24,274				(78,084	)			4,978				(5,925	)
(Loss) income from discontinued operations, net of tax(5)			—				—				(4,448	)			—				—
Income (loss) from continuing operations			1,353				24,274				(82,532	)			4,978				(5,925	)
Less net income attributable to the non-controlling interest			(366	)			(343	)			(295	)			(91	)			(88	)
Net income (loss) attributable to MacDermid, Incorporated			987				23,931				(82,827	)			4,887				(6,013	)
Accrued payment-in-kind dividend on cumulative preferred shares			(40,847	)			(37,361	)			(34,124	)			(10,788	)			(9,874	)
Net (loss) attributable to common shares		$	(39,860	)		$	(13,430	)		$	(116,951	)		$	(5,901	)		$	(15,887	)

From the balance sheet:

Stockholders’ Equity
Cumulative preferred shares, 316,000 shares authorized and issued, 315,254 shares outstanding at March 31, 2012 and 315,264 shares outstanding at December 31, 2011, respectively, including cumulative dividends of $175,237 and $164,449 at March 31, 2012 and December 31, 2011, respectively		$	491,237			$	480,449				—
Common shares, 50,000,000 shares authorized and issued, 9,946,140 shares and 9,946,439 shares outstanding at March 31, 2012 and December 31, 2011, respectively			50,000				50,000				314
Class A Junior shares, 430,000 shares authorized and issued, and 314,245 vested shares and 314,245 vested shares outstanding at March 31, 2012 and December 31, 2011, respectively			—				—				—
Class B Junior shares, 324,000 shares authorized and issued, and 100,156 vested shares and 49,878 vested shares outstanding at March 31, 2012 and December 31, 2011, respectively			—				—				—
Additional paid-in capital			2,254				2,156				542,171
Accumulated deficit			(280,359	)			(274,458	)			(280,359	)
Accumulated other comprehensive income			(9,261	)			(14,959	)			(9,261	)
Common and preferred shares in treasury, 746 preferred shares and 736 preferred shares and 53,860 common shares and 53,561 common shares at March 31, 2012 and December 31, 2011, at cost, respectively			(1,006	)			(994	)			—
Total Stockholders’ equity			252,865				242,194				252,865
Equity (deficit) in non-controlling interest			69				(388	)
Total equity			252,934				241,806
Total liabilities and equity		$	1,232,981			$	1,221,418

See accompanying notes to consolidated financial statements.

This looks really scary and unacceptable, but if the IPO happened, these cumulative preferreds would have been converted to common equity so on a pro-forma basis, those cumulative dividend accruals wouldn't be there (and wouldn't recur in the future).

The recent presentation doesn't include a detailed balance sheet so I don't know if these preferreds are still outstanding.  If they are, I would assume that these preferreds will be converted into common equity. 

The accumulated deficit of $280 million looks very un-outsider CEO-like.   But much of this is MBO related; up until the end of 2006, it looked like a normal company (from their 2006 10-K):

		Twelve Months Ended December 31,
		2006		2005		2004		2003		2002
OPERATING RESULTS:
Net sales		$817,609		$738,043		$660,785		$619,886		$611,490
Earnings from continuing operations before cumulative effect of accounting change		$51,850		$47,043		$53,224		$49,820		$31,477
Earnings (loss) from discontinued operations, net of tax		—		—		—		5,592		(22,128	)
Cumulative effect of accounting change, net of tax		—		—		—		1,014		—
Net earnings		$51,850		$47,043		$53,224		$56,426		$9,349
Basic earnings per common share:
Continuing operations		$1.68		$1.55		$1.76		$1.60		$0.98
Discontinued operations		—		—		—		0.18		(0.69	)
Cumulative effect of accounting change		—		—		—		0.03		—
Net earnings		$1.68		$1.55		$1.76		$1.81		$0.29
Diluted earnings (loss) per common share:
Continuing operations		$1.66		$1.52		$1.72		$1.59		$0.98
Discontinued operations		—		—		—		0.18		(0.69	)
Cumulative effect of accounting change		—		—		—		0.03		—
Net earnings		$1.66		$1.52		$1.72		$1.80		$0.29

				Restated(1)		Restated(1)		Restated(1)		Restated(1)
FINANCIAL POSITION AT YEAR END:
Total assets		$924,681		$819,927		$793,427		$709,794		$708,873
Long-term debt (including short-term portion)		$300,851		$301,275		$301,341		$301,761		$316,467
Shareholders’ Equity		$414,671		$339,077		$323,740		$251,570		$218,718
SHARE DATA:
Cash dividends declared per common share		$0.24		$0.24		$0.16		$0.10		$0.08

From the balance sheet:

Shareholders’ equity
Common stock, authorized 75,000,000 shares, issued 47,686,761 at December 31, 2006 and 47,131,950 shares at December 31, 2005, at stated value of $1.00 per share			47,687					47,132
Additional paid-in capital			57,584					42,869
Retained earnings			411,261					366,807
Accumulated other comprehensive income (loss)			22,924					(3,051		)
Less—cost of common shares held in treasury, 16,845,198 at December 31, 2006 and 16,546,763 at December 31, 2005			(124,785		)			(114,680		)
Total shareholders’ equity			414,671					339,077
Total liabilities and shareholders’ equity			$	924,681				$	819,927

---





So that's quite normal.  The 2007 MBO was disastrously timed (right before the great recession) so the income statement and balance sheet looks like a total mess. 

But if you look through the capital structure issues and just focus on the operations, it looks fine.

Great Annual Reports
I just read through the annual reports from 1994-2006 which are available at sec.gov.  I wasn't familiar with MacDermid at all when it was listed, but the annual reports are really well-written.  They are inspired by Warren Buffett. 

Here's a snip from the 1998 annual report:

     Nineteen ninety-eight was an eventful year.  After 60 years of
inspirational leadership Harold Leever, our Chairman, has chosen to become
Chairman Emeritus.  He will continue as a Director.  What a ride!  In 1959
Harold, with a number of employees, bought out MacDermid's founder, Archie
MacDermid.  In the early '60s, in what turned out to be a brilliant
strategic move, he led a tiny metal finishing cleaner company into the
electronic chemical business.  This was a huge bet at the time, and we are
still enjoying its fruits today.  Perhaps more importantly, Harold
established the MacDermid Philosophy.  It is printed as usual on the
inside front cover of this report (before the numbers).  Today the "Clan
MacDermid" with over a thousand members in 19 countries around the world
is as focused as ever on the Philosophy's core principles:

focus on the customer                     honesty and integrity
supreme worth of the individual    challenging and demanding environment
entrepreneurship                             teamwork and cooperation

Harold has been our spiritual leader for 60 years and will continue to be
forever.  I hope you can join us to celebrate this milestone with Harold
and Ruth Ann at our annual meeting on July 22.
     Another important event in 1998 was a non-event which we believe
defines who we are as clearly as what did occur.  We entertained acquiring
a fairly large company that would have immediately added to earnings per
share.  But, given our optimism about our internal growth prospects, we felt
the acquisition would dilute per share results several years out and thus
turned it down.  We are focused on building long-term shareholder value. 

While acquisitions can be and have been important, we will issue shares only
when we receive at least as much in business value as we give.  Tomorrow
becomes today rather quickly.  Not only is that our responsibility to you,
but it is in our own self interest.  Your employees, through our investment
plans and options, own 35% of the company.  Many, like myself, have the vast
majority of our net worth invested in the company.

I added the italics.

The shareholders' principles were plagiarized (Leever's term) from Berkshire Hathaway with the permission of Warren Buffett.

MACDERMID  CORPORATE  PHILOSOPHY

OUR  BUSINESS
     MacDermid  Incorporated  is  in  the international business of researching,
developing,  acquiring,  manufacturing,  marketing,  and  servicing, for optimum
profit to us and our customers, specialty chemicals and systems for the chemical
treatment,  surface  preparation  and  finishing  of  metals, plastics and other
materials  in  accordance  with  accepted  ecological and social considerations.
OUR  CUSTOMERS
     We  will  create  an industry image that automatically causes people in the
industries  we  serve  to  think  first  of  MacDermid.
     We  will justify their action by first thinking of the customers' needs ---
what's  right  for  them  makes  it right for MacDermid --- by supplying a total
system  including  processes,  know-how  and services that assist in meeting all
their  needs.
OUR  PEOPLE
     We  continue  to  believe  in  the  supreme worth of the individual and the
dignity  of  his  or  her  work  for  the  benefit  of  all. We will provide the
opportunity  for  our  people  to  fulfill  satisfactorily  their  own  personal
objectives  and  ambitions  and  reward them in proportion to their contribution
toward  achieving  the  Corporate  objectives.
     We  will  continue to be a place of opportunity where people "have the guts
to  fail."  We  will  encourage  the  entrepreneurs  and  innovators.  We  will
continually  challenge the goals, objectives, organization and all the operating
and  procedural  aspects  of  our  business  and  modify  them  when  needed.
     Our  progress and your progress, our Company's long-term advantage and your
long-term  advantage,  lie  in  our  human resources. Other advantages that come
about  from technological improvements, the opening of new markets, lower costs,
etc., all prove to be relatively short run. So, basically, it is the initiative,
the will and the motivation that people bring to their work on which we rely for
our  survival  and  growth.
     We will continue to try to attract new people who have creative and probing
minds;  people  who  will  at  times  be  disturbing  --  questioning policy and
procedures.  If  we  are wise, we will welcome it, resolve it, put it to work or
forget  it.
     We  will  continue  to  expand  with the best possible talent available and
continue  to  train them, and ourselves, so that we each increase our ability to
contribute  to  the  Company's  progress.
     We  will  each  strive  to  exemplify  the MacDermid Spirit of teamwork and
cooperation  throughout the organization which has been instrumental to our past
and  present  growth  as  a  corporation.
WHAT  WE  CAN  EXPECT  FROM  YOU
     First and foremost, we expect of you a fundamental honesty --- honesty with
yourself,  with  your Company and with all those with whom you interact, whether
they be associates within our organization, our customers or society in general.
Character  and  strength  have  always been born of honesty and a willingness to
face  up  to  the  truth  of  each  situation  as  it  arises.
     Second,  we  expect  and  insist  on hard work. An easy life, marked by the
absence  of  difficulty, builds neither character nor happiness. We believe that
self-realization of the individual is founded on accomplishment, which implies a
willingness  to  make  the  sacrifices  necessary to get the job done the way it
should  be  done.
     Third,  we  expect  you to accept responsibility. Every assignment you will
have  carries  with  it  a responsibility for accomplishment. Commit yourself to
achievement which you consider beyond the scope of your talents and then program
your  effort  to  translate  it  into  a  reality.
     Fourth,  we  expect  of you a loyalty --- loyalty to yourself, your family,
your  associates,  your  organization  and  our customers. We have always worked
together  as an organization and your own personal achievements will be measured
in  terms  of  the  contribution  you  make  to  our  joint  effort.
     Fifth,  we expect you to demonstrate good judgment. Judgment is essentially
an  ability to appraise facts. Factual knowledge must come before good judgment.
This  means  you  must continually educate yourself on our Company, our products
and  our  industry.  In  this  way,  you will have the material on which a sound
appraisal  of  good  judgment  is  based.
     This  is  what  we  expect  of  you,  and being in an extremely competitive
environment,  we  have  a  real  urgency  in  this  expectancy.
WHAT  YOU  CAN  EXPECT  FROM  US
     One,  you  can expect from us the fairest treatment of which we are capable
---  fair  in  respect  to  matters  of compensation, fair in respect to working
conditions  and  fair  in  respect  to  personnel  policies.
     Two,  you can expect from us, as a Company, complete honesty in whatever we
do.  Your assignments will never compromise the principles of honesty and common
decency  which  we  also  expect  you,  as  an  individual,  to  uphold.
     Three, you can expect that we will provide assignments which will represent
challenges  to  you  ---  assignments  which will enable you to grow toward your
professional  and  personal  objectives.
     Four,  you can expect that we will offer opportunities for advancement. Our
desire  is  to  grow  from  within.
     Five, you can expect that we will be a demanding organization --- demanding
of  your  time,  your  talents  and  the best which you as an individual have to
offer.  In  this  way  our  company  will  grow  and  you  will  grow  with  it.
     Perhaps  all  this  can  best  be summarized in these words from an unknown
author:
"Create  mental  pictures of your goals, then work to make those pictures become
realities.
Exercise  your  God-given  power to choose your own direction and influence your
own  destiny  and  try  to  decide  wisely  and  well.
Have  the  daring  to  open doors to new experiences and to step boldly forth to
explore  strange  horizons.
Be  unafraid  of  new  ideas,  new  theories  and  new  philosophies.
Have  the  curiosity  to  experimentto  test  and  try  new  ways of living and
thinking.
Recognize  that  the  only  ceiling  life has is the one you give it and come to
realize  that  you  are  surrounded  by  infinite  possibilities  for  growth
and  achievement.
Keep  your heart young and your expectations high and never allow your dreams to
die".

MACDERMID  SHAREHOLDER  PRINCIPLES

1.OUR  VISION  IS  TO  BUILD  ONE  OF THE WORLD 'S GREATEST INDUSTRIAL COMPANIES
We believe that the excitement inherent in the culture of ultra high performance
will  differentiate  us from our competitors, who, while fine companies in their
own  right,  simply  will  find  it impossible to keep up with the fighting Clan
MacDermid.
2.OUR  FORM  IS  CORPORATE,  OUR  ATTITUDE  IS  PARTNERSHIP
Unlike  many  public  companies, our employees and Directors own close to 33% of
the  shares,  so,  we  obviously think as owners. We hope that you consider your
investment  in  MacDermid as being a part owner of a business, much as you would
if  you  owned a small business in partnership with your close friend or family.
You would not be concerned about the evaluation of that small business weekly or
monthly.  Many  employees, including your CEO, have the vast majority of our net
worth  in  MacDermid  stock. We intend to be very long term holders, thinking in
generational  terms.  We  desire  to  partner  with  like-minded individuals and
institutions.  We  will  not  respond  to  short term pressures from the market.
3.WE  FOCUS  TO  BUILD  INTRINSIC  VALUE,PER  SHARE
We  define  intrinsic value as the present value of free cash flow, measured per
share.  Cash  flow  will  be  invested in growth opportunities. We will build in
significant  margin  for error in investment assumptions. We have no interest in
top  line growth for growth's sake. Per share cash flow is what counts. Our goal
is  to increase per share intrinsic value by 25% per year. We believe in setting
stretch  targets  even  though  sometimes  we  may  fall  short  of  our  goals.
4.PERSONAL  AND  CORPORATE  RESPONSIBILITY
MacDermid  will  demonstrate  the  highest  standards  of personal and corporate
ethics  and  responsibility,  with  special emphasis on our environment. We take
seriously  our leadership commitment to the communities in which we do business.
5.CARE  OF  OUR  PEOPLE  IS  A  TOP  PRIORITY
We  know  to  build one of the world's greatest industrial companies requires an
unusual partnership with the people charged with making the vision a reality. We
are  guided  by  the  MacDermid  philosophy,  including  our  clear statement of
commitment to our people, and our expectations of their commitment to MacDermid.
We  maintain  policies  that  encourage long, productive service. We avoid short
term  policies like layoffs and restructuring simply to make the current quarter
or  year numbers. That's not to say that we will not have reductions in staffing
based  on  performance,  or  if  we  feel  the  long term health of the business
requires  us  to  do  so. But even then we will do so with great reluctance. Our
people  are our most important asset. We treat them as such by investing heavily
in  training  and  education  and  management  development.
6.LONG  TERM  INVESTMENT  HORIZON
We will aggressively fund sound internal growth opportunities mostly in research
and  market  development  regardless  of  short term impact.  We will fund these
opportunities when the time is right, not necessarily when it is convenient. Our
internal  investment  opportunities  normally  offer  an exceptional return, but
often  require  multi-year  horizons.  We  will  avoid  the stop-start method of
investing,  which  is  typical  of  a  short  term  mentality.
7.LOW  COST  OPERATING  STRUCTURE
We  know  that  our  ability  to  invest aggressively requires us to have a cost
structure  lower  than our competitors. Investing AND lowering our current costs
constantly  is  a  core  principle  of  our  company.
8.HIGH  OPERATING  MARGINS
Growth opportunities will be passed through a margin filter prior to investment.
9.LOW  CAPITAL  EXPENDITURES
We  invest  shareholder  funds  in high return assets after a healthy margin for
error.  Bricks  and  mortar  have  no attraction if they will not produce a high
return.
10.CAPITAL  STRUCTURE
Cost  of  capital  is  an  important  consideration.  Our  ability  to  generate
relatively  high amounts of cash allows us to carry significant debt while still
maintaining  a healthy margin for error. We will issue common stock only when we
receive  at  least  as  much  in  intrinsic  value  as  we  give.
11.DIVIDENDS
Our  current  dividend  is a result of history. Increasing our dividend is not a
high  priority.  We believe we can better serve shareholders by using internally
generated  funds  to  grow  the  business  or  purchase  shares.
12.ACCOUNTING
We  will  be candid in our reporting to you. We will tell you the business facts
that  we  would  want to know if the positions were reversed, while safeguarding
information  which  would  aid  our  competitors.
13.REPORTING
We will be communicating with you in several ways. Through our annual report, we
will  try  to  give  all  shareholders  as  much value - defining information as
possible.  At  our  annual  meeting  we  will spend as much time as necessary to
provide  information  and  answer  questions. The forum section of our web site,
macdermid.com,  provides  shareholders  the  opportunity  to  submit  questions
directly  to  the  CEO.  We  will  answer  questions honestly and as promptly as
practicable.  In  all  of  our  communications,  we  try  to  make  sure that no
shareholder gets an edge. Our goal is to have all of our shareholders updated at
the  same  time.
14.FAIR  VALUE
To  the  extent  possible,  we would like each MacDermid shareholder to record a
gain  or  loss  in  market  value  that  is  proportional to the gain or loss in
per-share  intrinsic  value. Obviously we cannot control MacDermid's share price
but  by  our  policies  and  communications, over time we believe, are likely to
attract long term investors who seek to profit strictly from the progress of the
Company.

From the 2002 annual report

A  COMMENT  ON  WEIGHING  VS. VOTING:  Many of our shareholders know we are long
time  followers  of  what  I  call "Buffett Principles", taken from the business
philosophies  of  Warren  Buffett.  An  important  Buffett principle is, "In the
short  term  the  stock  market is a voting machine and in the long term it is a
weighing  machine".  This  means  that at any given point in time the market may
overreact  in  it's valuation of a particular stock, either too high or too low.
In  the  case  of  the late 90's bubble it overreacted towards the whole market.
Just  because the market says the dot com is worth so much "per hit", it doesn't
mean it is so - long term.  A business model that generates no cash over time is
valueless.  Further  this  principle holds that over time, financial performance
and market value tend to converge.   This principle is what drives our cash flow
discipline.  Frankly  I wouldn't take great comfort if I thought I had to depend
on  Wall  Street  to  "vote"  on  our relative success.  Our cash flow in effect
allows  us to take matters into our own hands.  Here's an overly simple example.
Say  we  generate $60 million in free cash flow per year for the next ten years.
At  the  end of ten years we would have $600 million in cash in the bank.  Today
our  market  cap  is  a  little  over $600 million.  Do you think all else being
equal,  our  market value would still be $600 million, or equal to only the cash
in  the  bank?  Not  likely.  Regardless of how depressed Mr. Market felt at the
time,  one would assume the more objective 'weighing' would have to take over at
some  point.  Maybe a better way to look at it is as follows.  Assume Mr. Market
was depressed for the whole 10 years, our stock price never moved, and we simply
took  the  cash and bought back our stock each year. In ten years there would be
one  share left that generated $60 million in free cash!  I think Mr. Market, no
matter  how  depressed he was, would offer more than $20 for $60 million in cash
flow!  So,  we believe that it is a mathematical certainty that if we perform we
will  be  rewarded over time.  The end result is called intrinsic value, defined
as  the  total amount of cash that can be taken out of a business over its life,
valued  in  today's  dollars.  The  above  example is admittedly superficial and
overly  simplistic.  However,  we have run detailed and sophisticated models and
firmly  believe  our  future  is  very  bright,  even  using  very  conservative
assumptions.  There  is  simply  no peer company of any size large or small that
comes  anywhere  close  to  our  cash  flow  performance.   If you want proof, I
recommend you spend the money to come to our meeting for interested shareholders
and  investors  in Omaha, Nebraska on May 2.  At this meeting we will go through
the detailed models and attempt to compare relative valuations over time between
our  model  and  a  traditional  model.

SEE  YOU  IN  OMAHA.  As  mentioned  above we will hold a meeting for interested
shareholders  and  investors  in  Omaha,  Nebraska  on May 2, two days after our
normal  annual  shareholders  meeting in Waterbury, Connecticut.  In addition we
will  hold a four day leadership meeting in Omaha at the same time.  One hundred
of our top managers from around the world purchased a $2,000+ share of Berkshire
Hathaway this year in order to attend the meeting.  We will attend the Berkshire
meeting  en  masse  and  then spend a couple of additional days discussing value
creation.  As  much  as  I  respect  Mr.  Buffett  and believe in the "Berkshire
Principles",  the reason we feel so compatible is due to the MacDermid heritage,
most of which was established by my father Harold Leever 50 years ago.  If these
principles  seem  familiar,  it's  because they are the foundation of MacDermid.

So go ahead and check out the annual reports, the letter to shareholders of MacDermid going back.  They are really well-written.

A Look at Some Historical Figures
The key here that grabbed my attention was the high cash flow generating ability of MacDermid.  90% or more of EBITDA becomes free cash flow to them which is very high compared to other specialty chemicals (see above table).  Also, their capex is less than 2% of sales.  I was wondering if this is sustainable, or if it is just starving needed capex. You never really know in these situations.  Sometimes companies will dress things up for a sale or IPO.

So I jotted down some figures from the old filings to see what these figures looked like in the past.  Instead of EBITDA, I just used operating income plus depreciation and amortization (OIBDA) because there was less math to do.  The ROE figure below is what I calculated using beginning and ending shareholders equity so it won't be exactly the same as what MacDermid reported (ROE wasn't always reported so I decided to use my calculation for consistency through time).

What Leever calls owner earnings in the annual reports is cash flow from operations minus net capex with adjustments for working capital changes, but in my table it's just cash flow from operations minus gross capex.   This (owner earnings) wasn't reported consistently throughout the period so I just use my calculation throughout for consistency.

Also, in the recent presentation, they use adjusted EBITDA.  None of my figures below are adjusted.  The EPS figures are adjusted for a split so is consistent throughout the period.

I split the table in two so you don't have to use a magnifying glass to read it:

MacDermid Financials 1994 - 2006 

During this period, sales grew +15.2%/year, net earnings +17%/year, shareholders equity +16.3% and EPS grew +17.4%/year.   But you will notice that a lot of the growth came in the period up to 2000.

One of the key measures we are interested in, capex as a percentage of sales, has in fact been pretty low even going back.  The average for the 1994 - 2006 period is 2.3%, and since 2001 it has been conisistently under 2.0%.  I suppose one can argue that capex was higher when they were growing more pre-2000, but I think a lot of that has to do with the problems they faced in the economy in 2001/2002, restructuring and things like that; they have been recovering since then.

Here is some more detail:

Free Cash Generation 1994 - 2006

First of all, we notice that ROE is pretty decent averaging 21% throughout the period.  But again, the period up to 2000 is clearly much higher than post 2000.  The OI / avg total cap figure is my proxy for return on capital; it's operating income divided by average shareholders equity plus long term debt.  It's a pretax figure, and it shows decent returns.

OIBDA is my EBITDA proxy (less math since it's easier to add operating income, depreciation and amortization than to add earnings, taxes, interest expense, depreciation and amortization).  It seems OIBDA margins were pretty good but are now much higher (EBITDA margins above 20% from the recent presentation).

The column all the way to the right shows my proxy for the cash conversion ratio. Again, my figure is different than what they use (OIBDA versus EBITDA, gross capex versus net capex, net working capital adjustments not included in my calculations etc).

But it does show their cash conversion over the whole period is 85% which is pretty high.  Even during the period of higher growth, returns and margins (before 2000), cash conversion was above 80%.

So it does look like this high free cash flow generative model is sustainable and is not a case of starving capex for the short term.

Conclusion
This post may be jumping the gun a bit since there hasn't even been a filing for the NYSE listing.  I'm sure there will be more detail we need to look at before deciding if this is an interesting investment.  I would love to know the final capital structure and ownership details (would love to see if Leever still owns a lot; I know he will roll over his current equity ownership into the new PSP).

But so far this is very interesting to me as:

• Management does seem to be outsider CEO-like and even founder/CEO-like as a substantial portion of his net worth was invested in the company.  The current CEO, Daniel Leever's father ran the business for decades so it's sort of a family business in that sense too.  The annual reports are great. 
• The high free cash flow generative ability and the fact that this model has been sustained over time is very interesting. 
• This is not a "a bunch of successful rich guys are involved in this so it should work" kind of investment idea, even though that was the catalyst to make me take a look at this.  I wouldn't invest in this just on the reputation of the backers.  But it is obviously a positive factor.
• So this is like a compound option (a call option on a call option?  Don't ask); you have an outsider CEO (Franklin) buying a company run by another outsider CEO (Leever) backed by a very good stock picker (Ackman).

There are many questions to be resolved, obviously.  I guess the biggest one would be Daniel Leever and his plan for the future.  He is 65 years old now; his father worked until he was 83 years old (but remained Chairman Emeritus) so there is still plenty of room.  But in annual reports in the past he did seem to mention the lack of bench depth.  I wonder what the situation is now in terms of succession plans.  I also wonder if Leever still has most of his wealth tied up in MacDermid.

Leever has said in the past that their goal was to grow per share intrinsic value at 25%/year.  They have come nowhere close to that, which is OK.  It's better to have a high goal and do OK rather than to try too hard to make the goal and blow up AIG-like.   It seems like the growth plans were thrown off with the recession back in the early 2000s, and obviously the MBO was very poorly timed happening in early 2007 right before capitalism jumped off the cliff.

In any case, I have found enough here of interest to "start a file" on it.