Based on Jana's holdings at the end of 2012, and a pro forma calculation, this new position in Ashland could easily put the chemical stock as one of Jana's three largest holdings and potentially make up over 11% of the hedge fund's portfolio.
The last time Jana had a stake in Ashland was during third quarter 2010, but the stake was a mere 400,000 shares, which was only 1.55% of its portfolio. This time Jana Partners is not simply looking for passive returns, but plans to be an active participant in enacting change at Ashland.
Rosenstein is not shy about what his hedge fund seeks to accomplish at Ashland:
We invest in basic industry companies that have recurrent cash flow characteristics that we feel are inexpensive...where there is a margin of safety...a very fundamental approach. The second requirement is that there has to be a catalyst...events like restructuring, recapitalizations and spinoffs.
Ashland operates as a global specialty chemical company in over 100 countries with about 15,000 employees. It operates in four segments and also owns 860 Valvoline Instant Oil Change centers and 336 Valvoline Express Care stores.
It also has an impressive revenue mix, with 53% of revenues from North America and 46% internationally; 26% from Europe, 13% from Asia Pacific, and 7% from Latin America.
Ashland Water Technologies (21% of sales) was formed via the merger of Hercules and the former Water Technologies unit of Ashland, providing chemicals for manufacturing and food processing and water treatment.
· Revenue for this segment is generated from paper processing (57%), industrial process chemicals (35%), and utility water treatment (8%).
Consumer Markets (25%) produces high-performance motor lubricants and chemicals for the consumer market, consisting of lubricants (86%), chemicals (7%), antifreeze (5%), and filters (2%).
· Brands include Valvoline motor oils, SynPower synthetic motor oil, Zerex antifreeze, and Eagle One and Car Brite appearance products. Ashland also operates the Valvoline Instant Oil Change chain consisting of company-owned and independently-owned franchise service centers. Revenues by market channel are: Do-It-For-Me (38%), Do-It-Yourself (35%), and Valvoline International (27%).
Performance Materials (19%) provides composite polymers, pressure-sensitive and structural adhesives, and casting solutions.
· Revenues by end market include construction (45%), transportation (28%), packaging and converting (17%), and marine (10%). Revenue geographically comes from: North America (68%), Europe (19%), Asia Pacific (9%) and Latin America and other (4%).
Ashland Specialty Ingredients (35% of revenues) produces natural and synthetic polymers derived from plant and seed extracts, cellulose ethers, and vinyl pyrrolidones that provide an array of properties.
· Markets for these products include personal care, pharmaceuticals, food and beverage, coatings, construction, and energy. Revenue by markets includes: specialty performance (28%), personal care (23%), pharmaceutical/nutrition (18%), coatings (16%) and industrial (15%).
Ashland’s Lackluster History
The company’s past five years’ worth of acquisitions have been unimpressive. In 2008, Ashland acquired the adhesive and emulsions business of Air Products & Chemicals for an undisclosed price. Several months later, Ashland bought Hercules for $3.3 billion.
In May 2011, Ashland bought International Specialty Products for $3.2 billion. ISP is a leading global supplier of specialty chemicals and performance-enhancing products for consumer and industrial markets.
Management has failed to unlock shareholder value. In the past five years, they have spent $5.5 billion to buy Hercules and ISP. Ashland's present market cap is only $6.8 billion. That leaves the value of Ashland without these two acquisitions at $1.3 billion.
Jana believes shares are “undervalued and represent an attractive investment opportunity.” Further, it has had “discussions with the Issuer’s management relating to, among other things, the Issuer’s business, corporate structure, capitalization, operations, strategy and future plans.”
Citi lays out four potential outcomes for Jana's stake:
1. Nothing occurs
2. Shareholders rewarded via cash flow
3. Shareholders rewarded via incremental debt
4. Shareholders rewarded and debt reduced with proceeds from asset sales
Citi believes that any of the 43% of the 2012 EBITDA not generated by Ashland's Specialty Ingredients segment could be a focal point for Jana, while its consumer markets (Valvoline) and Water Technologies segments would be prime divestment candidates.
Chris Shaw, an analyst at Monness Crespi Hardt, said, “Jana could very well push for a breakup, seeking a sale of non-core businesses like water and performance materials. We think there could be a high likelihood that asset sales happen.”
Valvoline is the number two U.S. franchised quick-lube chain and number three in passenger car motor oil. Ashland looked to sell this business in 2009 for up to $1 billion. Citi now believes that business could be worth north of $2 billion.
The Water Technologies has large exposure to the paper market (58% of sales), which has struggled of late. Citi estimates that this segment could be worth north of $1billion.
There appears to be plenty of value to be unlocked at Ashland, and based on Jana's track record, they are just the activist to do it.