Engine Capital has taken a 1% stake in Brenntag SE and is calling on the German chemicals distributor to prioritize a separation of its specialties unit, a move the activist believes could double Brenntag’s share price.
(Bloomberg) — Engine Capital has taken a 1% stake in Brenntag SE and is calling on the German chemicals distributor to prioritize a separation of its specialties unit, a move the activist believes could double Brenntag’s share price.
Brenntag’s specialties unit “will not realize the same valuation multiple as other pure-play specialty peers due to the conglomerate discount,” Engine Capital Managing Partner Arnaud Ajdler and Partner Brad Favreau said in a letter, a copy of which was reviewed by Bloomberg News.
The activist investor added that the company’s supervisory board, headed by Chairwoman Doreen Nowotne, needs to publicly recognize the value creation opportunity of spinning off these operations.
Shares of Brenntag jumped as much as 3% on Tuesday morning. They were up 2% at 11:08 a.m. in Frankfurt, giving the company a market value of €11 billion ($11.8 billion).
Brenntag is “resolutely pursuing the goal of creating sustainable value for its shareholders” and welcomes “constructive dialogue” with all its investors, a representative for the Essen, Germany-based company said in a statement.
New York-based Engine Capital is ramping up the pressure in the wake of Brenntag’s talks to buy US rival Univar Solutions Inc., which ultimately broke down last month. Engine Capital is also a shareholder in Univar.
While Engine Capital is calling for a share buyback program and improvement in the composition of Brenntag’s supervisory board, its key focus is a breakup.
Brenntag’s specialties unit “has significantly lagged the organic growth of pure-play specialty distributors” Azelis Group NV and IMCD NV, Engine Capital said in its letter.
Primestone Capital, another Brenntag shareholder with a 2% stake, has also urged the company to consider a separation of its specialties and essentials businesses into distinct listed entities.
Engine Capital said Brenntag itself stated at its capital markets day that the “core capabilities of a specialties distributor are fundamentally different than those of an essentials distributor,” adding a separation would remove potential conflicts between the segments and accelerate the specialties unit’s growth.
If both units were separated and trading in line with their respective peers, “Brenntag would trade at approximately €140 per share by the end of 2024,” according to Engine Capital’s letter, which adds the firm’s supervisory board has value creation under its direct control.
The shares closed at €69.84 each in Frankfurt on Monday.
Brenntag lags all peers on sales growth, margins, free cash flow conversion and business mix, according to a recent note from analysts at Jefferies Financial Group Inc., who said there is no sign of meaningful strategic change. Brenntag will find it hard to close the valuation gap for its shares, the analysts said.
Conversations with former Brenntag employees have corroborated Engine Capital’s view that it’s difficult for the firm to attract a skilled sales force for the specialties unit, and that customers penalize the specialties unit if products from the essentials arm have not been delivered on time, the investor said.
(Updates shares in fourth paragraph, adds company response in fifth paragraph.)
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