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Chemtura (CHMT)
Old 11-29-2010, 04:51 PM   #1
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Chemtura (CHMT)

After some digging and head-scratching, I have started to buy a bit of this thing and would be interested in any and all thoughts.

Chemtura is a specialty chemical maker which recently exited bankruptcy. The company was the reult of a highly leveraged combination of two chemical companies (Great Lakes Chemical and another whose name escapes me). The company subsequently blew up during the recession because its balance sheet was so over-leveraged that it could not withstand a rough patch.

What has emerged is a specialty chemical company with a collection of businesses that are either in specialized niches or a top 3 player in their markets. Half of sales are outside of the US. In the last 12 months to September the company generated $322MM in EBITDA. The post bankruptcy capital structure is about $750MM in debt and a smallish bit of contingent liabilities (pension, etc.).

This business has been starved for capital for years, so I would be quite surprised if management did not move quickly to put cashflow to work in projects with very high rates of return. As such, I would expect to see EBITDA growth even with no help from the economy. Of course if the economy does help out, the business will get a big tailwind.

So this looks like a beaten down cyclical trading at a bit more than 6X EV/EBITDA with a rationalized capital structure and an incentivized management team, hopefully heading into a modest economic recovery.

Thoughts? Gotchas?
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Old 11-29-2010, 10:25 PM   #2
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Originally Posted by brewer12345 View Post
After some digging and head-scratching, I have started to buy a bit of this thing and would be interested in any and all thoughts.

Chemtura is a specialty chemical maker which recently exited bankruptcy. The company was the reult of a highly leveraged combination of two chemical companies (Great Lakes Chemical and another whose name escapes me). The company subsequently blew up during the recession because its balance sheet was so over-leveraged that it could not withstand a rough patch.

What has emerged is a specialty chemical company with a collection of businesses that are either in specialized niches or a top 3 player in their markets. Half of sales are outside of the US. In the last 12 months to September the company generated $322MM in EBITDA. The post bankruptcy capital structure is about $750MM in debt and a smallish bit of contingent liabilities (pension, etc.).

This business has been starved for capital for years, so I would be quite surprised if management did not move quickly to put cashflow to work in projects with very high rates of return. As such, I would expect to see EBITDA growth even with no help from the economy. Of course if the economy does help out, the business will get a big tailwind.

So this looks like a beaten down cyclical trading at a bit more than 6X EV/EBITDA with a rationalized capital structure and an incentivized management team, hopefully heading into a modest economic recovery.

Thoughts? Gotchas?
Complicated question. I am not familiar with it, though years ago I had a brief and only moderately successful investment in Great Lakes Chem- as did WEB at one time.

My problem with this kind of business is that whatever management says about "specialty" chemicals, these businesses tend to be very sensitive to input costs, and a big process input as well as a big operating expense is always hydrocarbons-sometimes NG which is OK currently, sometimes oil which is not so good.

In an efficient world chemical businesses would wind up near cheap sources of energy and feedstocks, which is rarely going to be the US. It takes detailed knowledge to understand the main drivers in a complicated, multi-product and multi-market manufacturing business

I have not looked to see that circumstances are enough different with Chemtura to make this not relevant, which may very well be the case.

Ha
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Old 11-30-2010, 05:47 AM   #3
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Yes, feedstock costs are definately one of my concerns. Having said that, the business did manage to generate solid EBITDA in times of high gas costs. I will need to investigate further. If NG is indeed the main feedstock, I have a "texas hedge" on via a significant position in a large NG E&P company.
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Old 11-30-2010, 07:37 AM   #4
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Ed_the_Gypsy has a chem eng background and may even know the company & people.

When I stopped reading Chemical & Engineering News in the 1980s, my impression was that the business had become a vicious commodity industry with ruthless consolidation. Back then every major company had some environmental liability that was either their problem to fix or at least their problem to pay for (SuperFund).

You've probably already looked at the pension expenses and employee healthcare insurance, including liability for exposure to hazardous chemicals. Next would be curiosity about what corners they've been cutting on the waste-treatment side and how they're going to handle the liability/insurance for any landfill/creekbed surprises, including ongoing litigation. Third would be how they're going to pay the capex to modernize after all those years of starving the equipment for maintenance (reliability/repair costs) and upgrades. It'd be mighty tempting to borrow that money.

Does management have a big ownership stake, or are they all turnaround specialists who have finished the bankruptcy and are now ready to move on?
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Old 11-30-2010, 08:02 AM   #5
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You've probably already looked at the pension expenses and employee healthcare insurance, including liability for exposure to hazardous chemicals. Next would be curiosity about what corners they've been cutting on the waste-treatment side and how they're going to handle the liability/insurance for any landfill/creekbed surprises, including ongoing litigation. Third would be how they're going to pay the capex to modernize after all those years of starving the equipment for maintenance (reliability/repair costs) and upgrades. It'd be mighty tempting to borrow that money.

Does management have a big ownership stake, or are they all turnaround specialists who have finished the bankruptcy and are now ready to move on?
You would be amazed at what you can get rid of via the bankruptcy process: pension liabilities, retiree healthcare obligations, environmental issues, lawsuits, you name it. So that stuff is by and large sorted out. The capex will be funded via internally generated cashflow. The company has $750MM in debt and TTM EBITDA was $322MM, which would leave in excess of $250MM annually in cash to put back into the business if they wish to do so. I would not expect them to throw all of their cash at capex, but they will use a chunk. They will also likely pay down their bank debt.

Management is a mix of finance types, a restructuring officer who will probably go away within a year, a lawyer, and executives from elsewhere in the chemical industry. the people actually running things are from Hercules, Ashland, Hexcel, etc. They have an incentive plan that appears to incent EBITDA growth. Management and directors have been buying stock.
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Old 11-30-2010, 09:13 AM   #6
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Management and directors have been buying stock.
This carries a lot of weight with me.

Ha
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Old 11-30-2010, 09:34 AM   #7
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This carries a lot of weight with me.

Ha
I sould correct that to read "a" director has bought stock in the open market for cash. Management and the board have been granted incentive equity.
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Old 11-30-2010, 09:54 AM   #8
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I sould correct that to read "a" director has bought stock in the open market for cash. Management and the board have been granted incentive equity.
Well that's a positive indicator.

I guess the only other question would be whether companies in their sector/size are paying dividends. Kinda early after a bankruptcy for that behavior.

You've probably already spreadsheeted a doubling of feedstock prices (as well as a doubling of prices of other catalysts or consumables). But it sounds like they've been weaned off the dangers of debt/leverage anyway.

Does it take a long time after a bankruptcy for the rest of the market to recognize your analysis? In other words, are you going to have to wait an extra two years because no one else thinks the company is worth its numbers? Or does a big EBITDA produce the usual response regardless of a recent bankruptcy?
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Old 11-30-2010, 10:07 AM   #9
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Does it take a long time after a bankruptcy for the rest of the market to recognize your analysis? In other words, are you going to have to wait an extra two years because no one else thinks the company is worth its numbers? Or does a big EBITDA produce the usual response regardless of a recent bankruptcy?
Varies considerably. I have seen a number of small/midcap names get acquired within a couple of years of BK exit because their competitors recognize the value more than the markets. OTOH, the company is currently on a major roadshow effort (presenting today), so they may get analyst coverage, etc. sooner rather than later.

I like to buy cheap stuff that is misvalued. If I am correct in my purchase, the exit strategy usually takes care of itself.
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Old 11-30-2010, 08:59 PM   #10
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I like to buy cheap stuff that is misvalued. If I am correct in my purchase, the exit strategy usually takes care of itself.
The part that bugs me is waiting for the rest of the market to reach the same conclusion and validate my prescience...
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Old 11-30-2010, 09:24 PM   #11
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Companies like Chemtura have hired us to do things for them. None of these companies were very profitable because they are in a cut-throat business where costs are everything. If their chemicals are the latest fad for farmers, they do OK until the next fad in fungicides, herbicides, and pesticides gets promoted by the sales reps of competitors.

These guys are probably just doing a rinse & repeat after the reorganization. I will be happy to be proven wrong, but history says otherwise.
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Old 12-01-2010, 05:42 AM   #12
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Yo, Nords,

You got pretty close.

I once interviewed with Great Lakes Chemical. Lots of interesting--but extremely toxic--chemistry, as I recall. (Does anyone remember the Phosvel Zombies? Stuff like that. There was a case where their fire retardant got into cattle feed once, IIRC.) Looking back, I am happy that I did not go to work for them.

I have no data, but I have the feeling that overall there are fewer numbers of chemicals made today than 50 years ago, due to discovery of deleterious health effects. A good thing.

Specialty chemicals are high value added products and the manufacturers must be very nimble. It is hard to amortize high capital costs when product life cycles are short.

Investing in that industry takes more investigation than I can manage these days. It is a mine field. The destruction of GAF by new management is an example.
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Old 12-01-2010, 05:58 AM   #13
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I appreciate the comments from industry fellow travellers.
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