LONDON, Sept. 20, 2023 /PRNewswire/ — Franklin Mutual Advisers, LLC (“Mutual Series”), which controls a 9.8% shareholding on behalf of its clients in specialty chemicals company Elementis PLC, has sent a public letter to the Chair of the Board of Directors.
You can find the letter here:
September 20, 2023
Mr. John O’Higgins
Chairman of the Board
Elementis PLC
The Bindery
5th Floor, 51-53 Hatton Garden
London
EC1N 8HN
United Kingdom
Dear Mr. O’Higgins and the Board of Directors,
As you are aware, the clients of Franklin Mutual Advisers, LLC (“Mutual Series”) have held shares of Elementis PLC (“Elementis” or “the Company”) since December 2020. We control those shares as their agent. As of September 19, 2023, Mutual Series’ Franklin Small Cap Value Strategy controls 57,314,756 shares of the Company’s stock, or 9.8% of total shares outstanding, which is currently the largest holding on your register.
Mutual Series’ Franklin Small Cap Value Strategy seeks to invest in companies with strong fundamentals and good growth prospects, but undervalued share prices, across multiple sectors and industries. We employ a patient, long-term, buy-and-hold approach to investing, seeking to deliver value-added returns for our investors.
Attractive assets with a discounted valuation creates a compelling investment
We first invested in Elementis in December 2020 following the withdrawal of Minerals Technologies, Inc.’s (“Minerals Technologies”) offer for the Company and resulting share price decline. We have a long history of making investments in the specialty chemicals industry. Additionally, we were impressed with Elementis’ healthy market position in its personal care and coatings businesses.[1] The Company’s strong gross margins confirmed to us that its products reside at the premium end of performance additives. As value investors, we were also attracted to a stock that had declined more than 50% since 2016, an inexpensive valuation relative to history and peers,[2] the potential for upside in earnings from a cyclical recovery in the Company’s end markets and publicly stated commitment to operational improvement.[3]
As you know, the personal care business has consistently delivered the highest operating margins for the Company, and for the first half of 2023 represented 44% of adjusted operating profit before central costs. This business primarily comprises active ingredients for cosmetics and antiperspirant actives with 85% of Elementis’ cosmetic products derived from natural materials.[4] The Company’s anti-perspirant active ingredients business holds the largest market share position in the world at 40%.[5] The Company’s coatings business (which produces high-value additives used in paint) contributed 41% of first-half 2023 results. The segment has consistently reported mid-to-high teens operating margins which attests to the Company’s ability to achieve value-based pricing.
Value destructive capital allocation resulting in shareholder losses
Despite these positive attributes, the Company’s capital allocation decisions have contributed to an extremely disappointing degradation in the share price. Specifically, the Company spent $860M to acquire SummitReheis and Mondo Minerals in 2017 and 2018, respectively. Subsequently, the Company has incurred over $200M in impairments associated with the Mondo Minerals acquisition.[6] Since 2016, the stock price has declined by more than 50% and the Company’s current market value is less than the amount spent to acquire these two companies.
This is a shocking amount of shareholder value destruction.
Inability to improve operating performance and financial returns
In 2016, Elementis appointed a new CEO and CFO to “Reignite Growth.” At the Company’s November 2019 Capital Markets Day, management established a 17.0% adjusted operating margin objective. Almost four years since this objective was established, the Company’s first-half 2023 adjusted operating margins were only 14.4%, far short of its goal. We acknowledge the pandemic occurred in this time; however, we question if this objective is even achievable and, if so, why it would not be increased following the divestiture of the lower margin Chromium business.[7]
As of the period ending June 30, 2023, the Company’s invested capital base has more than doubled to $1.1B from December 31, 2016, inclusive of the impairments mentioned above, while return on capital has more than halved, contributing to a 50% decline in the stock price.
Failure to find a clear path to narrow the Company’s valuation gap
In December 2020, Elementis received a takeover offer of 130 pence per share from Minerals Technologies. In March 2021, the Company received a conditional offer of 160 pence per share from Innospec, Inc. (“Innospec”). As justification for rejecting these offers, Elementis told shareholders that fair value ranged from 198 – 225 pence per share.[8] Since the rejection of the prior offers, the share price for Elementis has averaged a mere 123 pence, approximately 38% below the Company’s low end of fair market value.[9] In our opinion, this indicates a significant lack of confidence by shareholders (and the market) in management’s ability to unlock the substantial value inherent in the business.
Despite this, Elementis has significant value to a strategic buyer
We believe that the Company is not of a sufficient size to accomplish its targets. We contend it would benefit from being part of a larger organization to achieve economies of scale. The Company’s revenue is half that of its next closest peer (and a quarter of the size of the peer median of $3B). However, as noted above, prior attempts to gain scale inorganically have yielded disastrous results.
Under these circumstances, a strategic merger seems necessary and, ultimately, inevitable. A large portion of the Company’s corporate cost base could be eliminated by a strategic buyer with access to cost savings via economies of scale. Based on our analysis of precedent transactions, we believe cost savings available to a strategic buyer could be significant.
In our view, the prior offers from two strategic buyers confirm Mutual Series’ perspective that Elementis could be a desirable acquisition target. Recent value destructive acquisitions have totally undermined any confidence in management’s ability to use shareholder capital for inorganic growth. In any event, Elementis does not have the financial size (TTM EBITDA of only $138M) to execute transactions that will markedly change its scale and the depressed valuation rules out share-based transactions.
Elementis should immediately and publicly announce a sale process
The continued stagnant share price, far below prior acquisition offers and the Company’s own fair value range, is unacceptable to shareholders and should be unacceptable to the Board. Based on our analysis, we believe the private market value of the Company is significantly higher than today’s stock price.
We have considered multiple scenarios for the Company, including a change in management. However, due to several factors, including the substantial valuation gap to private market value, the strategic attractiveness of the business as evidenced by prior bidders, and its small scale, combined with significant synergies potentially available to a large buyer, we believe a sale of the Company is the most attractive option for shareholders.
As a result, we strongly recommend that the Company publicly announce a competitive and formal sales process (before the Company’s Q3 trading update on October 31, 2023) to investigate the possibility of maximizing value for all shareholders.
Communication: extensive prior dialogue expressing our concerns
In extensive private communications, which commenced in April 2021, we have pursued a constructive dialogue with individuals including yourself as Chair, Paul Waterman (CEO), Ralph Hewins (CFO) and James Curran (IR). In our many conversations, we extensively outlined our frustration with management’s value destructive capital allocation, inability to improve operating performance and failure to find a clear path to narrow the Company’s valuation gap.
In August 2021, we spoke in detail with you and Mr. Curran regarding our analysis that, while the Company had consistently produced EBITDA margins in-line with the median for the peer group, its returns on invested capital had significantly degraded following the acquisitions of SummitReheis and Mondo Minerals, on both an absolute basis and relative to the Company’s cost of capital.
In our February 16, 2023, letter to you, we further expressed our concerns and questioned management’s ability to deliver share price growth.[10] We concluded our letter with the recommendation that the Board initiate a review of strategic alternatives to maximize value for shareholders.
Due to a consistent lack of progress, we have now reluctantly decided to make this letter public. While we frequently engage with companies regarding various shareholder matters in private, we rarely do so in public. However, we believe it is in the best interest of all shareholders to be aware of these issues. Additionally, if more shareholders share their concerns with the Company’s Board, we hope these issues might finally be properly addressed.
Sincerely,
Steve Raineri Chris Meeker
Senior Vice President-Portfolio Manager Vice President-Portfolio Manager
Franklin Mutual Advisers, LLC Franklin Mutual Advisers, LLC
Franklin Mutual Advisers, LLC, the investment advisor for the Franklin Mutual Series funds, is a wholly owned subsidiary of Franklin Resources, Inc., a global investment management organization with subsidiaries operating as Franklin Templeton.
For more information on Franklin Mutual Advisers, LLC: www.mutualseries.com
For media enquiries, please contact Greenbrook: mutualseries@greenbrookadvisory.com, Rob White and Tashi Lassalle +44 207 952 2000
SOURCE Franklin Mutual Advisers, LLC
LEGAL NOTICE: The information provided here and in the linked letter should not be construed as legal, tax or investment advice or a recommendation or solicitation to buy, sell or hold any investment. The views expressed in the letter are those of the signatories and the comments, opinions and analyses are rendered as at the date of the letter and may change without notice. These views may differ from those of other investment staff within Mutual Series or within other investment management teams of Franklin Templeton which operate with independent investment discretion. Franklin Templeton accepts no liability whatsoever for any loss arising from use of this information or reliance upon any comments, opinions or analyses in the letter.
[1] Market share position noted in 2019 CMD presentation
[2] Sika, Givaudan, RPM International, Symrise, Imerys, H.B. Fuller, Avient, Stepan, Croda International, Ashland, Minerals Technologies, Innospec, Ingevity
[3] Management had established a 17% adjusted operating margin objective at 2019 CMD event
[4] Natural ingredients penetration noted in 2019 CMD presentation
[5] Market share of AP actives noted in 2019 CMD presentation
[6] 2020 goodwill impairment $33.4M, 2021 goodwill impairment $52.3M, 2022 goodwill impairment $103.4M, 2022 property, plant & equipment impairment $23.4M, Elementis’ annual report, note 5 adjusting items
[7] TTM revenue and EBITA excluding $7M of Group costs allocated to Chromium equal to $171M and $21M, respectively, Elementis press release 11/30/2022
[8] Elementis “Response to Mineral Technologies’ Proposal”, December 2020, page 18
[9] Average share price of Elementis from 12/10/2020 – 09/15/2023, Bloomberg
[10] Franklin Mutual Advisers, LLC letter for Mr. John O’Higgins, February 16, 2023
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