Tag: M&A analysis

IFF Receives Approval for Dupont’s N&B Business: Waiting for the Right Entry Point $IFF

Reading Time: 4 minutes

When I first heard that IFF was buying Dupont’s Nutrition and Biosciences business, I gagged. I had known IFF from my time covering chemicals and knew it as a “secret SAAS business”, if you will.

For example, IFF provides scents and fragrances to perfume manufacturers. I like luxury brands, given “secular growth”, and IFF seems like an excellent “pick-and-shovel” play. In other words, I don’t have to pick the perfume that is going to win, I can just pick the underlying technology that should grow as the rest of the markets grow. A rising tide can lift all boats.

That’s not all IFF does – it also makes fragrances for household goods, detergents, and makes flavors as well. IFF used to be split ~50/50% between Flavors and Fragrances. IFF acquired Frutarom, which specialized more in the “natural” taste and scent market and also catered to small-to-mid sized companies, which also seemed to be a longer-term growth story (though in my view, this is really a GDP-ish business. I’d be buying for the stability + high ROIC).

I do view the ROIC here as “best-in-class” and like that IFF still seems underappreciated by the market. This isn’t a Sherwin Williams or something that is discussed everyday (yet).

As you can see below, to me, IFF had the “sexier” product portfolio as opposed to N&B.

I say this coming from experience covering Ashland. Ashland is a chemical producer that can be described as “specialty” (as opposed to “commodity”). Typically, this means high margins, limited capital intensity, lower volumes, and limited exposure to raw material changes like some commodities (e.g. ethylene).

But Ashland always had SOMETHING go wrong. They would spend several quarters talking about how great their personal care business is, and then next thing you know the profitability in that segment gets whacked and they’d have a big miss. And it turns out that Ashland’s components are certainly lower volume, higher margin business – but it is still highly competitive and subject to price cycles much like commodities are.

IFF’s core portfolio, especially fragrance, struck me as the better business. I recognize many of the Ashland constituents within the former Dupont’s business (cellulosics, guar). This is also clear through looking at gross margins (though not a perfect analysis), IFF’s historically 45% GMs compare to N&B with 36%.

That being said, from what I could glean from the proxy, N&B ROIC was still very good (they did ~$1.4BN of EBITDA on $3.6BN of tangible capital). N&B + IFF will also be way more diversified so a guar gum collapse wouldn’t kill them.

And that got me thinking that this deal could be much better than I expected. After all, N&B competes with Chr. Hansen (a beloved stock in the “compounder bro” universe) and it trades at 26.5x 2022 EBITDA at the time of writing… Chr. Hansen is a niche producer, though. N&B + IFF isn’t, so your company profile is “diluted” if you will… but scale matters too.


IFF & N&B just received approval to merge (its be a long, drawn-out process to get all the approvals). About a year ago in December 2019, the two announced they would be merging via a Reverse Morris Trust in a transaction that valued Dupont’s N&B business at 18.4x  2019 EBITDA, or 15.2x post synergies. This is a high multiple, but when you think about Chr. Hansen, the ROIC these businesses earn, and also think about the synergies between the two businesses, it makes sense.

While I like the business, the tough part will be integration. This is a massive transaction and sometimes analysts on Wall Street forget that pushing two huge companies together isn’t as easy as it looks on paper.  As I noted above, these companies kinda  operate in similar markets, but not really.

The interesting thing about the long, drawn out process is that the combined company has had to put out S-4s (which detail everything about the merger) along the way. We just got another S-4 on December 22, 2020. Unfortunately, both companies have reduced what they were expecting for 2021+ EBITDA. I don’t typically put much faith in these proxy projections anyway because they are typically inflated to get a deal done. In this case, I’d trust it more now that its come down and 2021 is closer to reality from a timing perspective.

IFF already had issues integrated Frutarom (and the latter had a bribery issue that had to be addressed), so it does concern me that they want to do a big deal again.  To emphasize the point, my take from the proxy was the IFF would do anything to acquire N&B. It just wanted to make sure it was the winner. That typically doesn’t work out well…

The concern is that N&B and IFF will be so distracted merging, that competitors can emerge and take share. This would not surprise me in the slightest.

The company will also be ~4.0x levered, which the market typically hates even if you’re a good business  (footnote: I don’t hate this).

The set-up here seems attractive… to wait for a better day. Right now, the stock is pretty richly valued. Results are coming down. And while this is a high ROIC business, I think there are too many “hiccups” post-merger that can come out and drive the stock down.

I say all this as a means of preparation for that buying day. I will be watching this one patiently for a good entry point.

 

 

Angie Homeservices Should Takeover Yelp $ANGI $YELP

Reading Time: 6 minutes

I’ve recently been following Angie Homeservices (ticker: ANGI), which is ~85% owned by IAC. I’ve also followed Yelp for some time. But as I get more up to speed on Angie Homeservices, I can’t help but think they should acquire Yelp.

For those unacquainted with ANGI, its really the combination of a few different brands like HomeAdvisor, Handy, and Angie’s List. I think they should combine with Yelp to consolidate the market, gain additional revenue streams, and because it makes financial sense.

HomeAdvisor and Handy are “marketplaces” that connect consumers with service professionals for home repair, maintenance and improvement projects. They provide “fixed price” projects, where you can log in and select lawn mowing or house cleaning, and purchase it for a pre-set price. They also have a good platform for building out a more project and getting quotes (e.g. custom kitchen cabinets). Service professionals pay an annual membership to be included in the registry as well as “connection” revenue paid by the service provider connects when it connects with a potential consumer (regardless of whether the provider ends up doing the work or not).

The first question with services like this has to be: Does this make sense to the Service Provider? And based on ANGI’s data, it does:

Angie’s List is slightly different, in that consumers register on the website to gain access to a directory of service providers that have good ratings. Angie will ask certain questions about what project you’re doing and then connect you with a list of recommended providers. Angie’s makes revenue by annual service provider advertising dues. They also sell time-based website, mobile and call center advertising to service professionals. Angie’s List makes up ~20% of revenue whereas Homeadvisor and Handy make up most of the balance.

It is still early days for these companies. ANGI would point to the market being mostly driven by word-of-mouth, so despite being the biggest player in this space, they have <5% share of a $500BN market. It’s growth has been good as well (note though, Angie’s List merged with Homeadvisor in late 2017 and then acquired Handy in 2018, so not a perfect comparison).

 

Google Risk

Another thing to mention here, and a risk through-out, is Google. You can see that while sales have grown, EBITDA declined pretty precipitously in FY2019. I bet management wishes they could say “they decided to increase investments into the platform” but the truth is the proportion of unpaid traffic generated by Google declined and it also got more expensive to acquire customers through the paid Google ad channel. This ended up being a double whammy hit.

ANGI  said that ~40% of its traffic comes from Google (down from ~70% back in 2011), it is still an attractive channel, but they are going to have to manage that and diversify.  The real goal is that the service with ANGI is so good, people go direct to the site instead of just searching “plumber New York” in the future, which they’d have to pay Google for.

The other risk I see with Google is if they try to enter the market. While I think it is remote in the near term, we’ve seen Google enter the travel booking and review game, despite earning significant ad revenue from those customers (as I have discussed in prior posts). So it is something to consider. What ANGI needs, again, is to drive more people direct to their site like Amazon did. People are so comfortable with Amazon offering a good price and excellent service, they no longer need Google to direct them to what they want.

Why does Combining with Yelp Make Sense?

Yelp is very similar to Angie’s List, but there are some key differences. Yelp started with user generated content – people love to share their reviews and thoughts on restaurants and give an honest and fair review. Again, similar to looking at Amazon reviews before a purchase, it is very hard for me to eat at a restaurant now without checking the Yelp review.

The difference, though, is Yelp makes most of its money from ads (again, Angie’s List is the ad platform for ANGI and just 20% of revenue). For example, you may have seen promoted businesses when you make a search on Yelp. However, I call Yelp’s revenue “advertising services” because there are additional feature they will add in for you such as a “call to action” (e.g. Call 1-800 to get a 1 week free trial), they’ll add in customizable coupons, and they’ll even let you pay to remove those pesky competitor ads!

Yelp has been adding additional services that help expand it out of restaurants. Personally, when my A/C was out this summer, I saw a lot of these features they discuss below:

So first, I think you can start to see that the businesses are very similar and there could be some significant synergies by combing these companies. I think ANGI could benefit from that solid review base of Yelp that continues to grow. That’s an “intangible asset” that is hard to quantify.

Second, you gain another customer channel and consolidate the market.

Third, you could include some of the fixed price services that Homeadvisor offers in Yelp and drive higher engagement. Hopefully that would lead to a recurring revenue base. Yelp actually derives a significant portion of revenue from home services (see next chart), despite having much more reviews in restaurants. In Q2’20, given restaurants declined and home services were at or slightly above pre-pandemic levels, home services revenue actually made up ~50% of revenue for Yelp.

Fourth, you diversify ANGI. As shown in the chart above, you add restaurants, shopping, beauty among others to ANGI. Perhaps they can think of other ways to expand in these channels as well.

Last, but not least, ANGI would be getting a good deal and actually has enough capital to take down a significant portion of YELP.

ANGI Could Offer a 45% Premium and it Would Still be a No Brainer

I decided to break down the math of ANGI acquiring YELP. YELP’s stock has gotten beaten up obviously during COVID, but I’m sure management wouldn’t sell at its current price. YELP also is a big time cash generator in the good times, given the ad model. With synergies, ANGI would be generating a lot of cash / market cap for a growth company.

ANGI could honestly issue no new equity, instead funding the whole purchase with debt. Why not, I say. They just raised $500MM of junk bonds at 3.875%. Their existing term loan is L+175. I assume they fund this with all term loan debt. Given the FCF they would generate, they could repay all the term loan debt in about 4 years.

To me, the combined stories make sense, the math makes sense, and there are synergies on both the cost and revenue side.