@Mahesh @crazymama Have attempted to compute the pre/post merger multiples for Adi/FairChem. Would appreciate it if you could kindly have a look at the attached excel and validate, it appears that we are paying ~1x Ev/Sales and 8x EV/Ebitda for the combined entity. Is my understanding correct? Many thanks. Fairchem merger analysis 03112016.xlsx (12.0 KB)
Whereas your given calculation seems to slightly confuse me like from where you arrived at 5.09 cr. shares figure post merger and still on that figure you arrived at 1.08x EV/Sales at CMP 530 per share…, but, on my part what I will do is give you my calculation as follows :
Also, in case you haven’t gone into detailed scheme document worth 200+ pages then do go through it as in that you will find all the precise data with respect to post merger equity and all in a correct way
Please find the calculation below :
Post merger equity capital of Fairchem = 2.64 cr. shares + 1.26 cr. CCPS
If we assume full conversion of CCPS then Equity Capital will become 3.90 cr. shares.
Post Merger FY16 Revenue = 780.10 cr.
Post Merger EBITDA = 108.80 cr.
Post Merger PAT = 27.60 cr.
Post Merger Net Debt (after deducting 150 cr. cash received from Fairfax in Privi which actually was not received till March’2016) = 129.40 cr.
So, if we now do a calculation, without considering conversion of CCPS and calculating it at FV 10 per CCPS for EV calculation :
@530 per share market price multiples are :
FY16 EV/Sales = 1.97
FY16 EV/EBITDA = 14.16
FY16 P/E = 50.71
Now, if we assume full conversion of CCPS at 350 per CCPS then all things like Revenue, EBITDA and PAT of FY16 will remain same but Net Debt portion and equity share portion and therefore EV will change as further infusion of 441 cr. cash will be there for issuance of 1.26 equity shares because of conversion of CCPS. So, net debt will actually become Net Cash worth 311.60 cr.
So, in that scenario, multiples at CMP 530 per share will be :
FY16 EV/Sales = 2.25
FY16 EV/EBITDA = 16.13
FY16 P/E = 74.64
However, one thing I want to point out here that if we are assuming full conversion of CCPS at say x price then because of cash infusion capex will be there which will benefit revenue and so calculation has to be made on such derived benefit. So, for the time being it is best to assume all multiples without conversion of CCPS.
In case of any further query feel free to get back.
Discl. - No Holdings.
Thanks for your response. I believe CCPS will also be issued to Fairfax to the tune of approx 1.18 cr (see note on page 24: http://www.adifinechem.com/Fairchem%20Speciality%20Limited%20Presentation.pdf)
Also, since CCPS are being issued to Equity shareholders, I assumed these were akin to bonus shares and do not entail further cash outflow on the part of investors. Is INR 350 the actual strike price or an assumption?
I will read the document and re work. My intention is to try and quantify the embedded ‘platform value’ we are paying for given Fairfax’s involvement.
Yes…CCPS are issued to Privi shareholders of whom Fairfax is a part in the same proportion as equity shares…existing Adi shareholders are not part of this.
350 is the assumed rate to depict the difference in calculation it will make…since 287 is the base taken for valuation of this deal so assumed this rate however it could be anything…
We are paying good premium to Adi at the present time for two reasons — one Fairfax involvement and Low floating stock… Otherwise it is interesting to note that if we do same combine calculation for FCF generation of merged entity over a 11 year period from FY05 to FY15 then we find that the figure comes to negative -(175.40) cr. out of which Privi alone is negative -(179.44) cr.
Privi’s business is very capital intensive since it is into bulk aroma chemicals like dihydromycrenol and Amberfleur and is also backward integrated to process CST. For a Gross Block addition of 266.80 cr. over a 11 year period Privi turned out a negative FCF of -(179.44) cr. whereas for a Gross Block addition of 62.20 cr. over a 11 year period, Adi turned out a positive FCF of 4.04 cr.
Similarly, for the said gb addition and an absolute increase in revenues from FY05’s 95.81 cr. to FY15’s 549.26 cr., Privi added net debt worth 210.90 cr. whereas for the said gb addition and an absolute increase in revenues from FY05’s 22.54 cr. to FY15’s 150.61 cr., Adi added net debt worth 12.28 cr…
11 Years’ average ebitda margin for Privi works out to be 11.87 % whereas 11 Years’ average ebitda margin for Adi works out to be 14.62 %.
Fluctuation range for 11 years’ ebitda margin is 9.50 - 14.69 % for Privi whereas that for Adi is 4.23 - 22.18 %.
Can anyone pl tell if Adi finechem is REACH compliant or not?
Check out this analysis.
With utmost respect for author’s views and even a greater respect for his attempt to make sincere efforts to point out as well as indirectly try to protect minority shareholders’ interest, I would like to present here my point-of-view on this deal.
– Privi acquisition was the result of an agreement entered into between Privi management and Std. Chtd. PE wherein Privi management had to provide an exit route to them with minimum fix IRR by the year 2016. Hence, this deal involved purchase of shares held by Std. Chtd. PE & affiliates for cash consideration of INR 220 cr. + Privi had an ~200 cr. CAPEX lined up for next two years so needed cash infusion so the deal also involved fresh equity issue for cash consideration of 150 cr…
Hence, in all, the deal required paying 370 cr. cash upfront.
– Now, as is pointed out in the said blog article, why this deal was not routed through listed Adi Finechem Ltd. ?? Where was the cash ?? Adi was a net debt company and had no net cash and Std. Chtd. PE required cash and not the shares of Adi Finechem Ltd…
– So, the second question arises asto why Fairfax didn’t choose to take pref. equity allotment route in listed Adi itself and therefore infuse 370 cr. cash in listed entity and then let it acquire Privi —
In case of such allotment at INR 350 per share (the rate talked in the said article), it would have involved further issue of 1.05 cr. equity shares to promoters which would have taken promoters holding to above maximum permissible 75 % as also triggered an open offer which was a time consuming process.
– Third question then arises asto why then Fairfax didn’t give low cost debt to listed Adi to fund this acquisition and let it directly acquire Privi —
In such a case what would have been the balance sheet of merged entity ?? 403 cr. net debt on Adi’s books and 96 cr. net debt on Privi’s books, so a net consolidated debt of ~500 cr. on consolidated FY16 sales of 780 cr. — how good was this ??
– Now, having looked at the constraints of routing the acquisition deal via listed entity, let’s have a look at pricing angle too which is the talking point in said article ----
Without Fairfax on board and as a key shareholder, would Adi (with 150 cr. TTM sales, ~15 % EBITDA and its key products facing headwinds in global market) quote at 23x TTM EV/EBITDA, 3.38x TTM EV/Sales and 45x TTM P/E ?? Markets already discount future beforehand and it was this impending deal of whom markets had got whiff of because of which this high price of listed entity was existent.
Now, let us assume that at 900 cr. privi acquisition is done instead of 725 cr. ; at that valuation, what would have been the multiples applied for Privi —
TTM EV/EBITDA = 11.64x
TTM EV/Sales = 1.58x
TTM P/E = 52.9x
Except P/E, which multiple seems unreasonable for an entity which is 4x listed Adi’s size and has consistent trackrecord of good profitability and most important has a great visibility of future growth to grow its topline at 14 % CAGR over next 3-4 years.
Yes, Privi has a clear visibility to reach INR 1050 cr. scale by FY20 barring unforeseen circumstances — how ??
– Unit III at Mahad which got operational in FY16-end is likely to contribute 60-70 cr. in first year and 105-110 cr. p.a. from second year onwards.
– Privi acquired specified assets of its job worker Yashashvi Rasayan in Bharuch, Gujarat for ~INR 25 cr. in FY16. Company is expanding capacities there at a cost of 115 cr.which is likely to get operational by FY18. Here, company will be manufacturing high value products like Menthone & its derivatives and in first year of operations it is likely to contribute ~110 cr. which will be gradually ramped up to ~300-320 cr. p.a. by FY20.
– In addition, with Privi acquisition, listed Adi has also got 3 patents lying under its wholly owned subsidiary Privi Biotechnologies. In collaboration with ICT & DBT, Privi Biotech is building a first of its kind unique facility at Nerul, Navi Mumbai which can facilitate R&D and pilot scale research with different types of agriculture bio-waste and convert it into value added products. First project is already getting set-up which is likely to get operational in FY18 which will involve manufacturing of food additives and non-food additives such as Vanillin, Xylitol, Gluconic Acids & Salts and Fatty Acids from second generation biomass like maize bran, rice bran, husk, paddy and non-edible oils. Once successful, the technology will, in probability be licensed to parent Privi Organics for commercial scale manufacture.
Now, with such great visibility on future profitable growth, even at 900 cr. valuation a 4x bigger size company was acquired at almost half the multiples at which smaller acquirer is quoted at.
– Agreed, Privi had generated negative -(180) cr. FCF in 11 years starting from FY05 till FY15 – however, it is FCF and not CFO – CFO in the same period is positive 186 cr. – higher than the yearly revenues of listed Adi.
– Privi has done a CAPEX of 360 cr. over a 11 Year period — 5 times that done by Adi over the same period,
– Privi’s Gross Block is 4x that of Adi,
– Privi net D/E without giving effect to 150 cr. fund infusion is 1.20 whereas after giving effect to 150 cr. fund infusion is 0.46 v/s Adi’s net D/E at 0.53
Now, look at other angle cited in said blog article asto entire business of Privi Organics was not transferred to listed entity ---- yes, as per info provided, a small negligible business of trading in inorganic chemicals is kept in Privi Organics — as per my understanding it is to keep Privi Organics in existence and later on merge promoter’s only other venture ‘Privi Lifesciences’ into it. Fairfax will be funding expansions planned there.
– So, is it that Fairfax acquired two companies by paying 370 cr. — may be, but even in that if we apply reasonable multiples based on TTM financials of Privi Lifesciences – FY15 Revenue 27 cr., FY15 EBITDA 5.1 cr., FY15 PAT 0.53 cr. with negative CFO — applying a EV/EBITDA multiple of just 12x and EV/Sales multiple of 2.3x, P/E becomes 99.84 and EV comes to 61.2 cr. of which 8.3 cr. is the debt on books so Fairfax would have paid 52.9 cr. if it wanted to acquire this business. So, in that case Fairfax acquired 50.8 % stake in Privi for 317 cr… Remember, here we have considered the most optimistic multiples which no PIPE deal-maker will pay.
To conclude, Fairfax paid 130 cr. to acquire 45 % stake in listed Adi and 317 cr. for acquiring 50.8 % stake in Privi (if we take possibility of Privi Lifesciences merger in fututre otherwise 370 cr.) – so, total acquisition cost for Fairfax’s stake in merged entity post Adi-Privi merger comes to 447 cr. (@370 cr. cost for acquiring Privi comes to 500 cr.) ---- interesting thing to note is if we exclude CCPS then Fairfax’s price per share in merged entity works out to be 354 per share (@370 cr. acquisition cost for Privi, works out to be 396 per share). Now, if we assume CCPS conversion without paying a single paisa, acquisition cost comes to 235 per share (@370 cr. acquisition cost for Privi, works out to be 263 per share).
Although author of the said blog and I have same intentions to protect minority shareholders’ interest, still, I don’t find any gross cheating done on Fairfax part in this deal. Yes – still the final structure is not known and minority shareholders will be cheated if –
– Cash of 150 cr. is not tranferred to listed entity.
– If the remaining business of Privi which will reside in unlisted entity and is not transferred to listed Adi is bigger than 10 cr. in revenue.
Discl. - Invested in Adi Finechem. Bought in the correction that came after the said blog article was posted.
Anybody still following the Business/Company closely?
After Fairfax on the board now & still being a Microcap, Opportunity Size seems to be huge.
Appreciate other fellow inputs, who have been tracking the business/Company closely.
Anybody still tracking the business opportunity after Fairfax on the board?
My notes from FairChem AGM on 11/8/17. Other attendees please add/correct where necessary.
Synergies between Adi & Privi
- Both use waste inputs (food oil waste and pulp/paper waste) to make valuable materials
- Privi is R&D focused and Adi is engineering focused - manpower and facilities are often shared
- Otherwise both are run as distinct businesses and nothing has changed for respective promoters since FairChem acquisition
Privi - Mahesh Babani
- Has achieved 20% 10 yr growth CAGR. Plans to sustain this
- Lots of R&D has been done for which benefits will accrue over 2-3 years
- Next year - hope to become world leaders in 2 new products
- “We touch your lives daily” aroma chemicals used in many fmcg products
- Top competitors have USD 300 mn - 2bn sales and compete with customers. Customers such as P&G, Henkel,Unilever etc therefore prefer Privi
- Entering flavours segment using byproducts from existing chemicals. Lab scale trials done, large scale production within 2-3 years
- 50-70 cr capex required for flavours. Infra, land in place.
- Expect 300 cr incremental revenues by FY21 and further 150-200 cr revenues from new biopesticide product
- Only 4 companies in world have assured supply of pine tree based RM, including Privi
- This is an entry barrier
- Fairfax is also invested in Pulp mills in Canada and can help source RM
- Expanding refinery capacity from 25k TPA to 37k. Will conservatively double sales within 5 years
- Long term 2-3 year contracts with mills to source RM
- 65% of sales on 6m contracts, can revise prices if need be
- 70% exports sales, 60% RM imported
- Entry barrier is sustainability. Not only in effluent treatment but in technology, HR, use of byproducts, sourcing of RM.
- Privi’s ROCE will converege to Adi’s Roce (20-30%) over a period of time
- Capacity utilisation is at 95% today but substantial growth possible through debottlenecking
- 3-4 multipurpose plants
- Typical fixed asset turnover of 3x
- Gross margins typically 24-26%
- Privi CFO was low because working capital cycle elongated. Backward integration caused bloated inventories, tried to grow export market increasing WC needs
Adi - Nahoosh Jariwala
- Why nutraceuticals products haven’t grown - hinted that this is not a profitable product today, contrary to perceptions
- Investment plan - Increase capacity by 30% in 2-3 years
Fairfax - Harsha Raghavan
- 30,000 small chemicals units in MH and GJ alone, some commoditized and facing Chinese competition
- Adi & Privi do not face any chinese competition for their products
- Fairfax typically looks for businesses where RM cannot enter/exit India, source of moat
- Utkarsh Shah, Chairman - we will aim to be best if not largest specialty chem. company in India
- Dedicated M&A head at FairChem
- FairFax is RoI obsessed, in no rush to close deals
- Will not provide any targets on scale and deals to be made as this will create unnecessary pressure and precipitate errors
- Many do many or no deals in a year
- Will always sacrifice short term performance for long term, declined to define long term - could even be decades
Hi Mahesh! Kindly excuse my inexperience. How did you get access to last 20 years data?
From company’s annual reports of respective years.
Okay. Where can you get last 20 year’s annual report? Website only has it for the last few years.
U can get them on Researchbytes