Outsiders in chemicals, the story of Rockwood Holdings

This piece is not about an investment idea, rather a case study of capital allocation and a story of a few Outsiders. When I first came across Rockwood I thought that this could be summed up neatly in a few paragraphs. Technically speaking it is possible but wouldn’t do justice to the story. The content is rather on the long side, however if you don’t feel like reading the whole thing the below quote, from Rockwood CEO Mr Seifi Ghasemi in early 2014, will give you the essence of what I’m about to describe.

This post is for investors who are (i) interested in stories of shareholder friendly managements and capital allocation, (ii) doing their homework on Air Products and want to learn further about Mr Ghasemi or (iii) doing their homework on Albemarle (eventual acquirer of Rockwood in 2014).

Onto the quote from Mr Ghasemi.

“In the last nine years as a public company we have on a consistent basis said that the only strategic goal we have at Rockwood is to maximize shareholder value. This is the guiding principle, which drives everything we do. Our job is to make money for our shareholders. We believe that in the long-term what matters is the increase in the per share value of our stock and not overall size or growth. 

I want to emphasize this point since it is the core of our strategic thinking; the act to increase the per share value of our stock and are not enamored with building an empire and running a bigger company. So it is this fundamental principle of focusing on increasing the per share value of the stock that led us to this strategic decision to sell 60% – yes, 60% – of our company and focus on our two core businesses. We publicly announced the key elements of our strategy a year-ago in January of 2013 and set the target of executing it in two years. Today, a year later, we have delivered on all elements of that strategy well ahead of plan.”

Rockwood was a specialty chemicals company ran by a great management team and ultimately acquired by Albemarle, returning 18% p.a. since the IPO in 2005 until the announcement of the sale in July 2014. The CEO – Mr Ghasemi - has since went on to transform the Bill Ackman backed Air Products.

Rockwood's history goes all the way back to the 1880s when the founder, Bernard LaPorte (back then known as LaPorte Chemicals) came up with a process to manufacture hydrogen peroxide, which was used for bleaching wool and straw hats, key products of the British economy during the industrial revolution. To conveniently skip 100+ years, LaPorte has fallen on hard times and certain parts of its business were acquired by KKR in 2000 for c. $1.2bn. In 2001 KKR brought in Mr Ghasemi, who has a background in chemicals and industrials and previously worked for GKN and BOC (now part of Linde). Mr Ghasemi, along with CFO Mr Robert Zatta and SVP of Law and Administration Mr Thomas Riordan took this business and over time converted into the largest lithium player in the world, handily enriching shareholders in the process.

Flying under the radar

The reason you probably haven’t heard about the company (unless you follow the lithium business) is partly because it’s a B2B company and partly because promotion was the last thing on management’s mind. Companies like Rockwood can hide in plain sight while compounding away. Management was always very low key but very much aligned with shareholders. Their mantra was decentralised operations and they ran Rockwood out of a small office in Princeton, small staff (25 at IPO, 35 at last count) with everybody on one floor. You could think of Rockwood as a holding company with a bunch of assets and hard-nosed approach for lean operations and value creation.

Comments from Mr Zatta (who previously worked at food giant Campbell Soup) in a 2014 interview paint a clear picture.

“Rockwood, with its small management team, definitely provided that [working in a non-bureaucratic environment]. “We didn’t have any bureaucracy,” Zatta recalls. “We didn’t create levels and layers of management for the sake of having process. We were very much focused on getting things done.”

The business is run on a decentralized basis, with the managers of individual units given the autonomy to run things how they needed to be done. “If they had a big capital project, or if they needed approval to shut something down, they only had to talk to myself and Seifi. And now that he’s not here, basically just myself.”

Rockwood’s leaders were crammed into close quarters. “We had our treasurer sitting in the kitchen. That was his office,” Zatta says. “Our controller sat at a secretary’s desk outside my office. When the CEO came in, the only room he could work out of was a conference room.” Zatta said the nimble management structure was a breath of fresh air compared to his big corporate background. “It was exhilarating,” he says.”

A slide from a 2014 investor meeting gives you an overview of their MO. Having read their filings, conference transcripts and presentations I’ve stopped counting the occurrence of “shareholder value creation” at about 347. At least I got the point.

Source: company filings

Act I: The beginnings - IPO (2005)

Rockwood started life as a portfolio company of KKR, when the PE fund acquired the pigments, additives, metal processing and other businesses, which constituted over 50% of LaPorte’s (UK chemicals co) sales, for $1.2bn (around 1.2x TTM sales and 8x EBITDA). Apparently, LaPorte’s share price drastically underperformed the FTSE at the time as the business had a bit of a rough patch due to a strong pound, rising oil and other input costs, hence they hoped that selling assets and focusing on their core operations (fine and performance chemicals etc) would help performance. LaPorte was also a bit of a hodgepodge of loosely related assets so selling things off seemed like the right thing to do. In general, the growth profile of chemicals and industrials businesses is modest, but PE firms like these assets given the stability i.e. they can be levered to the hills. In this deal KKR put about $0.3bn equity with the rest financed by debt.

As a side note, what makes a chemicals company a “specialty” business is that the products they sell make up a small percentage of customers’ operations but are critical to performance. These are in general lower volume, higher margin products as compared to their commodity cousins. Rockwood has built a portfolio of inorganic chemicals assets (i.e. no relation to carbon related minerals such as oil) in a diversified way.

Rockwood has grown via acquisitions of which the largest was the 2004 acquisition of Dynamit Nobel. The Dynamit acquisition included the businesses of Sachtleben (TiO2), Chemetall (lithium and surface treatment) and CeramTec (ceramics, hip implants etc) amongst others. Total consideration was $2.3bn (inc. assumed debt) and the seller was MG Technologies (now GEA Group) as the German conglomerate was separating its engineering and chemicals businesses. At the time Dynamit had sales of $1.6bn (compared to Rockwood’s $0.8bn) and EBITDA of c. $300m (paying just above 8x TTM).

With this acquisition Rockwood expanded into new platforms. While the actual operational overlap was limited, these businesses had one thing in common with the existing operations: speciality chemicals and the products represented a small portion of customers’ production costs.

From Mr Ghasemi at the time (the last point is key). “The four businesses we are buying are profitable stand-alone companies,” says Mr. Ghasemi. “There is no particular product overlap, but there is overlap in customers in the consumer products, construction, electronics and coatings markets. These are specialty chemical businesses where the definition is that the products they make are a small percentage of customers’ costs and essential to the way they make their products.”

The key here, as you’ll see below, was to get to the lithium business. Rockwood’s management was developing a thesis that an inflection point in the demand for electric vehicles in 10-15 years would cause a surge in lithium demand and a scramble for supply. But to get that business they had to buy the whole thing from Dynamit, with a few problem children.

Following this acquisition, as well as other smaller bolt-ons such as Groupe Novasep (subsequently sold in 2006 in an MBO) and the pigments business of Johnson Mathey, Rockwood would report $3bn in revenues and $570m in adj. EBITDA in 2005 (year end). The other side of this breakneck growth was the increase in leverage, on a gross basis Q1 2005 was close to $3.5bn with interest expense over $200m annually.

KKR decided that it was time to take Rockwood public and did so in August 2005 by selling 23.5m (inc. 3m greenshoe) shares at $20 apiece, raising $440m after discounts, which almost entirely went to pay down debt. Rockwood starting trading on the NYSE under the ticker symbol ROC (Jay Z must have been a buyer).

Prior to the IPO, the business was 75% owned by KKR, 22% DLJ (remember them?) while mgmt owned c. 1% of the business. Post IPO KKR’s stake was down close to 50% and has exited the business via a multiple of sell downs during November 2007, June 2008, December 2010, May 2011 and finally in October 2012.

The below slide gives you an overview as to the development Rockwood has gone from formation to post-IPO.

Source: company filings

Act II: The middle part – 2006 to 2012

As Mr Ghasemi elaborated during a 2011 investor meeting:

“We had two five-year plans that we have executed. The first five-year plan was to change the company culture, service the debt and live within the covenants, grow by acquisitions to more than $3 billion and take the company public. That was our main goal for the first five years. We accomplished that. 

Second five years, we wanted to optimize our portfolio, therefore we sold a lot of businesses. We executed bolt-on acquisitions to strengthen our core businesses. We improved our EBITDA margin to 20%. And we paid down debt. Our goal was three times, which we have – we are very ahead of that. So that was our second target. 

But I'm sure you are very interested in terms of what we are going to do for you in the future. I have some more details on that. But moving forward in the next five years, what are we going to do? First of all, why are we going to do what we are going to do? We want to create value for our shareholders. We measure ourselves strictly by the price of our shares. That is what – we exist to create value for our shareholders […]”

Rockwood closed the 2005 financials with $3.1bn in sales and $570m in adj. EBITDA. By 2012 the surviving businesses in the pursuit of higher returns on capital reported sales of $3.5bn and adj. EBITDA of $780m. While this might not seem like a lot of increase consider the divestments in the process. The core businesses such as lithium and surface treatment (previously part of specialty chemicals) or advanced chemicals have all performed well.

Source: company filings. Pie charts represent breakdown of revenues

During the 2005-12 period EBITDA margins increased from 18% to 22% given changes in the portfolio and operational efficiencies. More importantly net leverage decreased from about $2.7bn (almost 5x net leverage) to $1.5bn (about 2x), which is pretty substantial. In June 2012 management even instituted a dividend policy of paying out $35c per share per quarter ($27m per quarter). In the same period ROIC averaged 12%, FCF margin approx. 5% (positive every year, even in 2008/09) and FCF yield around 8%. This is pretty good in the chemicals space.

I’d mention a few key developments here and deal with a few housekeeping items. To start with the divestments, management sold a few businesses that you see in the 2005 breakdown but not in the 2012 financials, such as Group Novasep in an MBO (it produced pharma ingredients, for EUR425m or $540m EV at approx. 8x EBITDA), specialty compounds business to Mexichem ($300m EV at 1.3x sales and c. 9x EBITDA) or the electronics business to OM Group ($315m EV at c. 8x EBITDA). In addition, they bundled their TiO2 business (Sachtleben) with Kemira, Finnish chemicals co to form a JV where Rockwood owned 61%.

Management also made a run for Talison, a Canadian listed company with the world’s largest ore based lithium mine in Australia. Ultimately they lost out to a Chinese co named Tianqi, but as life works in mysterious ways Rockwood got another shot at it.

Management has been very disciplined in capital allocation. On a 2008 conference call, just before the crisis they noted the following: “Our priority we have said that our priorities number one is organic growth, number two is bolt-on acquisitions. We still have a lot of opportunities. We think actually that with the economic downturn, asset prices have gone down. We are not facing as much competition from private equity as before. As a result we think it's an opportunity to put our cash in use and to do some additional bolt-on acquisitions, which would be helpful.“

They had clear guidelines for acquisitions: the target had to be or have (i) global market position, (ii) adj. EBITDA margin of 25%+, (iii) global industry technology leader and (iv) limited exposure to oil-based raw materials (Rockwood’s bread and butter is in inorganic chemicals).

A word on the 2008/09 crisis. This had a pretty significant impact on Rockwood – sales and EBITDA declined 20% vs 2008. This was coupled with a pretty strong exposure to Europe as well as FX fluctuations. The business was helped by the diversified portfolio and a very proactive management – they’ve started cost cutting already in 2007 to reach $150m by 2009. As leverage was still high, they’ve renegotiated covenants and ultimately came out OK from the crisis. They also had to let people go (about 900 or 9% of the workforce) but mgmt. also froze their base pay, which didn’t increase $1 until 2013 (even then Mr Ghasemi’s stayed flat). Despite the solid results the share price dropped from above $40 at the peak in June 2008 to as low as $4 in early 2009.

A few housekeeping items before we move on.

You’ve noticed that in places I used adj. EBITDA as a metric. This was management favoured reporting method (and what they used internally too). This is basically reported EBITDA adjusted for one-off items. Now EBITDA is one thing, but when I see adjusted EBITDA all sorts of red flags are raised. To their credit they’ve at least been consistent and covenants were also tied to adj. EBITDA metrics. More importantly the company has been FCF positive all through the years (even in 2008/2009), while mgmt. comp was also tied to cash generation.

If you look back historically, the company for a long time traded at a discount to peers mostly due to the complexity of the portfolio (7 segments and 17 business units at IPO). The thing about specialty chemicals is that analysts are looking for a comp and if they cannot find it they’ll assign a discount, which of course creates opportunities for investors. Rockwood’s operations were also mostly based in Germany and other parts of Europe and issues such as FX (cost side) or macro risks (demand) hurt the company vs their peers oftentimes.

The good news was that management was always focused on shareholders and never engaged in empire building. They were always more concerned about the long term, never giving quarterly EPS guidance or forecasts but always laid out a framework of how they thought the business could compound, margins, how they controlled costs and capex, leverage and so on. Reading their transcripts of conference calls going back 7-10 years was very refreshing and full of common sense.

Rockwood positioned itself to be number 1 or 2 by market share in their respective businesses. About 70-80% of their sales came from businesses in such positions and management focused on getting out of the non-core ones. While changes were happening all along in the pursuit of a more rationalised portfolio, prompted by the undervaluation management decided to take drastic actions just as 2012 was coming to an end.

Act III: Management goes activist (2013 to 2014)

On a cold day as the world was getting over a NYE hangover management laid out something radical on a January 2013 investor day: shrinking the business by selling over 60% of revenue generating units and focusing solely on lithium and surface treatments. They certainly didn’t believe in sacred cows. The thinking was that the surface treatment business would be the cash cow: 25% EBITDA margins, low capex requirements (3% of sales on average vs 15% for lithium) and relatively good stability, fuelling the growth that was to come from lithium.

Management made a bold bet and starting selling assets off aggressively. In June 2013 they agreed to sell the advanced ceramics business (CeramTec) to Cinven (European PE fund) for $2bn (3.5x TTM sales and 11x TTM EBITDA). It was a high quality business with margins in the mid 30%s and given its presence in healthcare ceramics (think hip implants etc) a good exposure to the theme of ageing population.

Since they bought it as a package deal when acquiring Dynamit the like for like return comparison is not straightforward but assuming the $2.3bn price paid (inc. assumed debt) for then $1.6bn of sales (1.4x TTM sales), which then allocated equally to the segments (CeramTec was 18% then) would result in a 5x gross return (the multiple allocation is pretty subjective). If you assume constant multiples i.e. 3.5x TTM sales it’s a 2x gross return. The important point is that the return above is on an asset basis, in reality Rockwood used about $425m equity to buy the entire Dynamit business (as noted above CeramTec was less than 20% of the valuation) compared to selling just the CeramTec business for $2bn (gross proceeds – about 10% went to taxes, other fees etc - and a large portion went to pay down debt). It’s a pretty good achievement on an asset basis, amazing on equity. Why did they sell such a high quality business? On a conference call after the close Mr Ghasemi admitted that the exposure to a potentially huge medical liability didn’t let him sleep well at nights.

Next on the line was the Clay-based Additives business in July of the same year for $625m to Altana, a German specialty chemicals business for 3.3x TTM sales. This business was part of the performance additives segment. As a fun fact Altana (a company owned by one of the children of BMW founder Herbert Quandt) was considering buying Rockwood or parts of it in 2008, but talks didn’t materialise in the end.

Then to conclude the divestiture spree Rockwood neared the year-end by selling its TiO2 and the remainder of the performance additives business for $1,275bn (inc. pension) to Huntsman. The business generated $1.5bn TTM sales and $105m TTM EBITDA at the time of the announcement. Huntsman’s acquisition price was $1bn (exc. pension) so a multiple of about 0.7x TTM sales and 10x TTM EBITDA, however 2014 adj. EBITDA was expected to be over $200m (improvement of about $100m yoy, on volume, price recovery, raw material reduction etc) so the multiple is in effect was about 5.5x EBITDA at announcement (before synergies). The multiple seems low, but it’s roughly in line with peers. Some saw multiples fetching 6-7x given the speciality element in Rockwood’s business but that ultimately didn’t materialise. The deal happened amid a volatile period for the TiO2 industry with an industry restructuring so probably mgmt. preferred not spending any more resources on this business, which resulted in a decent sale in the end. This business was always a problem child for Rockwood, but as noted above the only way to get to the lithium business. The business was probably worth more in the hands of Huntsman. After a bit of back and forth on regulatory matters the deal finally closed in October 2014.

Lest you think we are done, Rockwood announced that after a failed attempt about a year ago it agreed to acquire a 49% stake in a JV with Tianqi (the parent company of Talison, which owns the Greenbushes lithium mine in Australia) for a total consideration of $516m ultimately (c. $1bn valuation). The saying of "if you cannot beat them join them" comes to mind. Mgmt. guided c. $50m proportional EBITDA from this JV (c. $100m on 100% basis) so would imply a multiple of around 10x, which is along the lines of peers. On a TTM basis with $60m EBITDA (100% basis) the implied multiple was 16.5x. In their 2012 run for Talison, Rockwood offered a valuation over $720m for $30m EBITDA, just as earnings were ramping up.

Talison operates the largest lithium producer anywhere in the world with about 100ktpa lithium carbonate capacity (global production capacity is about 250ktpa). The idea was that the eventual growth from batteries, cars etc would in the next 3-5 years more than compensate for the introduction of this monstrosity of capacity. The Australian mine doesn’t actually supply lithium carbonate but hard rock lithium, which other players (such as Tianqi, a Chinese hard rock converter and the largest in the world) process further. The mine is not the lowest cost but very close to China, while Tianqi is their single largest customer. In commodities you either make money with a cost or location advantage, if you’ve both - think nitrogen fertiliser producers in the US Cornbelt - you have found yourself a gold mine. Ultimately this move strengthened Rockwood’s presence in lithium globally. Additionally, Rockwood entered into an option agreement with Tianqi through 2016 which stipulated that Tianqi can take a 20-30% stake in Rockwood Lithium (which controls the EU and Asian arm of Rockwood’s Li business) at 14x TTM EBITDA less net debt if they wished so.

With the sale of approximately 2/3 of Rockwood’s business and over $3.5bn of gross proceeds received or on their way (vs 2013 ending market cap of over $5bn) you could say that 2013 has been a rather busy year, but all of these moves resulted in a clearer equity story and a better positioning for a large M&A. You could think that the story ends here but it didn’t take long for Rockwood management to shake things up and cap this remarkable story off.

Capital returns

Before we come to the end it’s worth making a quick detour to address capital returns.

Given the leverage and focus on growth, dividends and buybacks haven’t been too high on the agenda until 2012. The first dividend payment came in June 2012 when the company announced a $0.35c per share quarterly dividend ($27m per quarter), which was then subsequently raised to $0.40c per share in February 2013 and then to $0.45c per share (c. $35m per quarter) in August 2013. The dividend payout ratio was in the low to mid 30%s with a view to maintain a 2.8-3.2% yield (higher than industry average). In addition, Rockwood announced a $400m buyback in January 2013 just as it was embarking on its strategic simplification. This was completed in whole during Q3’13 and in November management announced an additional $500m, two-year buyback (this ultimately wasn’t completed). All in, shareholders received about $600m in buybacks and $300m in dividends from June 2012 through the third quarter of 2014. Furthermore, Rockwood paid down debt aggressively - from gross $3.5bn leverage in 2005 it was in net cash (pro forma for the last of asset sales) by late 2014. At the beginning Rockwood was essentially a public LBO.

A word about compensation and management shareholding. Compensation included a mix of base and performance based remuneration, however for the three key executives base compensation hasn’t gone anywhere between 2008-2013, while their performance based compensation was entirely tied to both short and long term financial - mostly cash flow - and relative/absolute share price performance goals. In a 2011 conference Mr Ghasemi commented that almost all of his net worth was tied up in Rockwood shares (both directly acquired and via options). At peak management beneficially owned close to 3% of the company, by early 2014 this was around 2% worth over $100m.

Act IV: Sale of Rockwood (2014)

Just as management was completing their strategic plan, they were on the hunt for their next move. In August 2013 Mr Ghasemi approached the CEO of Albemarle (US chemicals co) to acquire ALB, which didn’t go anywhere and Rockwood went on to focus on the acquisition of Talison. In February 2014 Mr Ghasemi approached again the CEO of ALB, now with a merger of equals plan but again this did not materialise. Following on from the two rejections Rockwood approached other PE and strategic investors. Some were interested in pursuing a transaction but not at the right price, while some PE shops only wanted the cash cow surface treatment business. In an interesting turn of events ALB approached Rockwood about an acquisition in early 2014. Mr Ghasemi indicated that shareholders would need a premium and a significant cash portion to even consider a deal.

Eventually in July 2014 the two companies announced a $6.2bn acquisition of Rockwood by Albemarle. The acquisition rationale was analogous to when Rockwood bought Dynamit Nobel’s businesses - increasing the number of platforms but not necessarily in already existing categories.

The per share consideration at the time was $85.53, paid $50.65 in cash and 0.4803 ALB stock (roughly 60/40 split) and ROC shareholders would become 30% of the combined company. The price meant a 13% premium to prior closing price. While this technically speaking is not a lot, the multiple paid was already on the high end. ALB paid a 14x forward multiple (around 11x including synergies), which is still pretty fair considering that only half of the Rockwood business is in high multiple lithium. Furthermore, as you’ll see below Rockwood’s share price significantly outperformed the market in 2013/14 given the delivery on the strategic plan hence one could argue that the then valuation already implied a high multiple. It’s actually a peculiar turn of events where Rockwood went from being a suitor to getting taken out at a premium. Management played it well.

An interesting twist before the acquisition (though probably on the cards for a while) was the resignation of Mr Ghasemi and his subsequent appointment as CEO of Air Products (Bill Ackman backed industrial gases co) in June 2014. To handle the acquisition, Mr Zatta and Mr Riordan stayed on.

As Pershing was wading through the corporate slog that APD was, they appointed Mr Ghasemi to the board in September 2013 given his experience in the industry and after a 10 month long search process the board decided that Mr Ghasemi was indeed the best candidate and elected him as chairman and CEO effective of July 2014. The industrial gases sector is a lot more concentrated than the specialty chemicals (owning to a previous industry consolidation) hence his remit is to basically restructure the business internally and focus on capital allocation. When his appointment was announced APD share price jumped 8% on the day and reached all time highs. Here is a recent video from Delivering Alpha where Bill Ackman describes how the board came to appoint Mr Ghasemi (watch from the 6:20 mark).

In Conclusion

I know that this is highly theoretical but since the listing in August 2005 through the announcement of the acquisition in July 2014 meant a compounded total return of 18% p.a., performing in line with the wider specialty chemicals sector but outperforming the S&P’s 8% p.a. return. In line performance with the sector comes from a larger drawdown during the 2008/2009 crisis. If you look at the second chart, since the end of 2008 (not even counting from the lows of March 2009) Rockwood returned 46% p.a., ahead of peers and the S&P. Since the end of 2012 (just before the announcement of the strategic dismantling of the company) the stock returned 44% p.a., again ahead of peers and the S&P.

Source: Bloomberg

If you made it this far you probably wonder why I took the time to put all of this on paper. I think that the fundamental performance of Rockwood is remarkable, considering the time period and the sectors they operated in and shows a few key lessons.

Management matters - “Outsiders” are by definition rare. While there is certainly a hindsight bias here, once you find them just sit back and hope they have a long runway ahead of them. Running Rockwood from small HQs, tucked away in Princeton allowed management to make decisions without the burden of bureaucracy and analysis-paralysis.

Disciplined capital allocation is paramount - Having clear guidelines, conviction and financial discipline for growth and/or capital returns can make or break the company. Management essentially bet the farm on lithium but remained disciplined. For instance, instead of getting into bidding war over Talison, Rockwood walked away from a deal in 2012 only to come back in 2013 when the prospects were better.

No sacred cows - While somewhat related to the above, Mr Ghasemi and team were willing to let go approx. 2/3 of their business because that was the right thing to do, without fear as to how that would impact their compensation or social standing (most CEOs like to run bigger, not better companies). It’s not about growth, but value creating growth.

Leverage works both ways - Leverage was a big part of the story and prudent financial management ultimately led to great returns on capital. From $3.5bn gross to net cash in less than ten years, without capital raise is remarkable considering the cards they were dealt at the beginning.

I’d close with two slides Mr Ghasemi presented on his first ever investor call with APD in July 2014 and at a recent investor meeting just a few weeks ago this September. The message is clear.

Source: Air Products filings

Mamma mia here I go again

Posting has been quite sporadic recently due to other commitments and will continue to be over the summer months due to a project I’ve codenamed “beach”.

This write-up is about a $300m market cap, Greece heavy, London listed luxury real estate developer so if you feel like you can stop reading right here. The company is called Dolphin Capital Investors and for me it’s the second time around with the stock. I was involved back in 2012 and since then have been a spectator.

To give you a brief background Dolphin is a luxury real estate developer focusing on emerging markets (and now Greece fortunately or unfortunately classifies as one). It’s essentially like a junior mining company that goes around prospecting on a piece of land in hope of finding whatever minerals they are after, however in this case the outcome is considerably more sexy. The company’s strategy since inception in 2005 has been to acquire coastal land and develop high-end hotels and resorts with world class partners. This meant that they have acquired a large amount of land in sight in many countries for which realistically speaking they didn’t have the money to develop and the company turned into a hodgepodge of assets. I could spend pages about the history of the business but I think to an extent it is not as relevant as what’s happening at Dolphin currently.

But before we get there just a brief overview of the business. The company owns and develops projects in 6 different countries and breaks their projects into two categories: core and major projects with the first being the more advanced ones. In terms of NAV, around 80% is in Greece and Cyprus with the rest in Croatia, Turkey, Panama and the Bahamas. Below are some slides from a recent corporate presentation.

Source: Company. Note the figures are as of June 2014. For more recent, though less colourful data refer to pages 16-17 of the Q4'14 report

Dolphin published their Q4’14 update just a few days ago. NAV is currently €557m or around £68p on a per share basis (both € and £ will be used here as the company reports in € but listed in London so the share price is in £). The share price is £21.5p and is getting closer to 2012 levels. This translates into a discount of around 70%. And you might think that’s great…but why on earth should I care, it’s been cheap for a very long time. And if you glance at the below 5 year chart you are absolutely correct. Investors have been reluctant to give full credit for Dolphin’s NAV due to questions on the underlying valuation (i.e. how much of a decline in Greece is captured in the figures) and risk of higher than expected cash burn (not unheard of for a property development company). It also didn't help that on top of the ListCo there is a privately held investment manager that charged 2% on the AUM (now you understand the asset hoarding).

Source: FT

This time is (likely, maybe, potentially…hopefully) different. Let me take you back a bit to 2012. In October that year Third Point took a stake in a company via an equity raise, participating in an aggregate €50m round at a price not too different from where we are today. The macro situation in Greece hasn’t been supportive, I think we can agree on that, and I’ve also heard the same stories that you probably heard about the management of the company so we can assume that Third Point must have been getting pretty frustrated with this position. But they are still hanging in there.

I’m going to conveniently skip a few years and fast-forward to February 2015. Dolphin put out a press release where they announced plans to do the following (i) change the board of directors and add directors who either have significant real estate background or represent key shareholders, (ii) review the business plan, with focus on developing the core assets coupled with disposals, (iii) review management/investment manager compensation and (iv) less onerous governance. So far so good.

To follow up on this the company announced the following a few days ago: (i) separation of assets into core and non-core buckets with divestments on the cards, (ii) lowering the investment management fee and (iii) €75m capital raise (inc. conversion of the 2016 converts). Let’s take these in turn.

The core projects are as follows: Greece - Amanzoe, Kilada Hills and the Kea Resort; Playa Grande Club & Reserve (Dominican Republic) and Pearl Island (Panama). The company aims to develop these into resorts but further capital allocation is controlled by the board. Regarding the non-core bucket (which is basically everything else) the company plans to sell these eventually and will continue developing them to an extent to increase value. Considering the company’s 49.8% stake in Aristo (Cypriot residential real estate developer) the plan is also to sell out.

For what it’s worth, the company sees total net cash flows from the development of core projects and asset sales of €320m during 2015-19 (majority in 2018-19). In addition, they estimate €384m residual value post 2020 and €101m NAV of the undeveloped land for a total value of €805m (pre-tax basis). The company also plans to reduce gross debt from €265m in 2015 to €42m by 2019. More details starting from page 50 of the attached. Returns from core projects and proceeds from asset sales will be distributed to shareholders via buyback or dividend.

The management fee, which is currently 2% of total equity (€681m as of June 2015 – annual fee of €13.6m) will we be cut to the lower of (i) €8.5m flat fee or (ii) 1.25% of GAV from 2017 onwards. All in the board sees around €23.5m savings over five years. The performance fee has also been reworked substantially both on the returns from core assets and sale from the non-core bucket. The investment manager has been granted options totalling 6% of shares outstanding with the target share prices ranging from £35-80p for a five-year period (subject to periodical vesting and hitting performance targets). Worth noting that three board members will also spend more time on Dolphin matters so they’ll receive annual fees ranging from £150-200k and options totalling 1.25% of shares outstanding (less strict target share prices ranging from £35-50p). This is quite generous.

And last, the €75m capital raise provides the “sources” for this new strategy. The company issued 219m shares at £21p (c. 7% discount to prior closing price). As part of the capital raise Fortress, the investment manager and another investor also agreed to convert $14m of the outstanding at a lower conversion price (the remaining c. $15m holders will stay put). The overall proceeds will be used for working capital, 2015/16 opex, investment manager fees, interest and repayment of the 2016 converts. On top of the €79m funding needs the company also requires about €27m to fund the core projects, which they plan on sourcing from asset sales, JV project financing or debt (you’ll find the details on page 9 of the following document. Third Point subscribed to the capital raise and maintain their 20% holding (approx. £11m additional investment). Combined with the other investors they’ll hold around 50% of the shares, while the investment manager will own 9.7% of the shares PF for the capital raise. All in, share count increased from 640m to 905m.

Assuming all of the above doesn’t work out the board will put the continuation of the company to a shareholder vote before December 2016. If the outcome of this is a vote of no confidence, the company could be wound up, liquidated, or restructured. Thus there is additional time pressure on the management to deliver.

Coinciding with the release of the strategic review Dolphin released the 2014 results, but honestly it was a bit of a non-event amongst all the changes announced. The company generated €22m in net income (first time ever!) though mostly helped by gains on real estate revaluation. This implies around 12x P/E on a fully diluted basis.

Per the Q4’14 numbers NAV is £68p and the current share price of £21.5p for a discount close to 70%. If you make the adjustments to take into account the recent capital raise the discount closes to around 60%. And while discounts can move, perhaps it is somewhat reassuring that historical project exits took place at a money multiple of around 1.7x to cost.

Despite the positive developments and announcements the share price has gone exactly nowhere in the last few days. Perhaps the capital raise spooked people, though not sure why as the business was in need of funding if they wanted to continue development. Of course there is a small matter of execution as well.

Not even sure where to begin with the risk factors: Greece, largely illiquid land investments, so-so track record, asset hoarding and really I could go on. However, with the changes around the board, governance, strategy, compensation etc there might be something here warranting a closer look. I see this idea essentially as a deep value, long-term option on the recovery of Greece and improvement in the company's strategy and execution.

If you prefer to see what these guys do there is a short documentary on YouTube. It’s worth a watch, some of their stuff is really sexy. Oh yes and in closing, the company posts broker reports on their website. Read those with a pinch of salt.

Tingyi, or how to be successful if you ever find yourself in the middle of a noodle war

I don’t often write about compounders. It takes a different set of skills to correctly identify and conceptualise all the moving pieces that would make a company a real compounder vs simply buying cheap stocks. Having said all of that, there is a company I’ve been following for a while that could turn about to be an interesting situation.

Tingyi was founded in the early 1990s, listed in HK and is a large China based food and beverage company that is going through some changes. It is the largest producers of instant noodles in the world (e.g. 56% market share in China in value terms as of 2014, which is the largest market by far). It has a majority ownership in a beverage JV with its ParentCo, Pepsi and Asahi. This JV is the largest in China and has market share of 55% in ready to drink tea, 26% in juices and 19% in bottled water. 

Tingyi owns the Master Kong brand, which is probably the most well-known and valued instant noodle brands in the country. Its current market share is about 56%, with plans on reaching 60% in the coming years. In terms of size, noodle business revenues are about 3x of the next competitor in China, which gives it financial firepower and scale. This proved to be very important in what can be best described as the noodle wars or sausage wars in China. Starting in 2009, one of Tingyi’s competitors, Uni-President began promoting new noodle products by giving away free sausages and offering price discounts. Tingyi retorted and given its scale and firepower it was gradually able to put an end to this nonsense. While both peers suffered a decrease in operating margins, for Uni-President these new, aggressively marketed products represented a large % of overall revenues while for Tingyi they were (i) much smaller – c.15% of noodle sales and (ii) it could cover promotional costs much easier from profits from other product lines. As a result Uni-President was bleeding more and eventually conceded. It was very interesting to follow this live, essentially textbook economics 101. It will be a good lesson for competitors – whom are hurting from margin and share loss – to consider carefully any such moves again. Incidentally, a similar battle went down in milk teas as well.

Interestingly, while the Master Kong brand is very famous in China it doesn’t “travel" well (but who cares if you own the largest market). Having conducted a non-representative survey in HK, customers there prefer different brands to Master Kong (due to food safety issues amongst others) but when in China it’s the No.1 brand they seek out. There you go, fun fact for the day.

Tingyi got into the drinks business in 1996 and slowly expanded its brand portfolio and geographical coverage. Later it sold a stake in the beverage business to Asahi and Itochu and in a faithful turn of events this business was merged into Pepsi’s China unit in 2012 (more on this below). The drinks business consists of four major types of products: tea, water, juice and CSD and Tingyi has top market share across these segments (est. 30% in the overall non-alcoholic drinks market in China). In addition, with the Pepsi brand portfolio Tingyi has an exposure to faster growing products such as sports drinks, spring water etc though these are out of reach for most consumers yet in terms of prices. In 2012 Pepsi came knocking on Tingyi’s door after years of losses in their China beverage business. In Q1 that year the parties announced that Pepsi will inject its bottling plants into Tingyi’s beverage business and take a 5% stake (!) with an option to increase it to 20% by 2015. In it’s current shape this JV is 47.5% owned by Tingyi, 30.4% Asahi, 17.1% Ting Hsin (Tingyi’s ParentCo) and 5% Pepsi. What did Tingyi get in exchange: an inefficient business with a drag on margins in the last few years (EBIT margins dropped from 9% in 2010 to 3-4% in 2012/13). No seriously, the portfolio expanded as well as revenues and given hard synergies Tingyi was able to stop the bleeding in 2013 (promotional and raw material cost reduced, increased sharing of beverage distribution and production between the two companies etc). Moreover, on the HR side Tingyi is restructuring the sales and distribution units to make the Pepsi business as efficient as their own.

Finally, as noted above Tingyi has a substantial distribution network in China, e.g. about 37,000 wholesalers, 118,000 directly serviced retailers and 130 production facilities. This platform serves also as a springboard to distribute other F&B brands and to that end Tingyi started JVs with foreign companies (such as Calbee of Japan or most recently with Starbucks). In addition, mgmt. is considering domestic M&A such as in instant foods (ex noodles) to grow this segment.

Source: Tingyi. Distribution and production facilities across China

After reading about this fabulous company you’ll probably think that the share price hasn’t seen a down day since the listing. Well, not quite. The share price has gone exactly…nowhere for the better part of the last six years. In fact, it’s at the same price it was in late 2009. While sales have increased from $5bn to the current $10bn, operating and net margins have declined from around 12% and 8% to 7% and 4%, respectively. Essentially, revenues doubled but profitability stagnated partly due to integrating the beverage business, noodle wars etc that took a toll on margins. However, forward multiples remained relatively flat over the last five years: EV/EBITDA 13x, EV/EBIT 18x and P/E 29x (rarely below 25x) on average, which is quite generous considering all of the above. It is worth noting that Tingyi trades at a premium to its China peers due to large market share, strong scale advantage and expected growth trajectory.

In terms of revenues, noodles represent 40%, beverage just shy of 60% and instant food, others etc the rest. In terms of EBIT noodles make up over 60% (essentially the cash cow of the group). In 2014 Tingyi generated revenues of $10.2bn and EBIT of $685m. Overall, net income and EBITDA reached $400m and $1.1bn during the year. Results are moderately down from 2013 given a decline in noodles sales due some food safety issues and scandals. Food safety, as I’m sure you aware if you travel there, is a huge issue in China. Over the last year or so Tingyi’s ecosystem was hit with a number of scandals for products being found in food that were not exactly meant for human consumption. While not all of them impacted Tingyi’s products specifically, some implicated companies owned by its ParentCo. Either way it’s not a pleasant issue to deal with and certainly affects sentiment.

Looking at valuation and earning power. These last few years have been challenging for Tingyi given all the operational issues, however the future is looking brighter. What could this business generate over the next couple of years? Assuming 7.5% p.a. revenue growth between 2014-17 (below historical rates), element of margin recovery (though below peaks) for both EBIT and net income to around 8.5% and 5.5% respectively (also below guidance) and historical average trading multiples, I get to a share price of around HK$26 (vs HK$16.6 currently) for 18% CAGR. My numbers are below guidance and probably on the conservative end of things. While I acknowledge Tingyi’s scale and capabilities many things will have to go right in the process (Pepsi integration to mention one). But that is OK; this is an idea with a long runway ahead of itself and not a quick turnaround. Tingyi maintains a 50% dividend payout with a current yield of 1.7%. It’s worth noting that there is debt on the balance sheet ($1.5bn net, mostly to pay for new HQs and other facilities) but Tingyi generates strong free cash flow and capex will be declining in the next couple of years (mgmt. guides $600-800m p.a.).

Tingyi reminds me of situations I’ve seen before in many emerging market branded businesses. Large, well-capitalised, foreign company ABC decides to enter XYZ emerging market (naturally after sitting through hours worth of eloquent consultant presentations) only to have their head handed to them by an incumbent local producer, either with a brand so ingrained in the culture that no amount of advertising could change or such scale that replicating it would take a lifetime. For instance Ulker, a Turkish biscuit company comes to mind.

Governance wise Tingyi, like many in Asia, is a controlled company. The founding family (originally from Taiwan) owns 1/3 of the company via Ting Hsin, Sanyo Foods another 1/3 (Japanese food co, stake acquired in 1999) with the rest in free float in HK. There is a very good profile on the founding family from a 2011 Forbes article if you care to read further.

Risks worth keeping in mind: (i) competitive landscape – while competitors are probably licking their wounds, another round of noodle wars could hurt profitability, though Tingyi would probably come out victorious, (ii) food safety issues – it can kill a brand and Tingyi had it’s fair share of bad news recently (while not all related to it), (iii) increase in commodity / input prices – it’s a food business after all and (iv) delay in integrating the Pepsi business, M&A execution etc.

Tsui Wah Holdings

We’ve all been there. You mysteriously find yourself in Hong Kong’s Lan Kwai Fong area, 3am on a midweek morning wondering home when you stumble upon an open Tsui Wah restaurant on Wellington Street with a great sigh of relief (swear it only happened once to me, okay maybe twice…). Tsui Wah is an institution in Hong Kong with its history dating back to the 1960s. It is a restaurant type that’s locally known as a Cha Chaan Teng (loose translation is tea canteen), mostly found in the Southern part of greater China (HK, Macau, Guandong etc), combining the elements of Cantonese, Western and other Asian cuisines in a casual setting. Highly recommend a look at their Top 10 dishes (of the 170+). The Cha Chaan Teng market is highly fragmented with a lot of mom and pop shops in HK but TW is the largest with a 3.2% share.

The company went public in late 2012 to raise funds for expansion. At the end of 2012 it had 22 stores, generating sales of HK$760m. TW currently has 47 restaurants across HK (29), China (17) and Macau (1). In the last financial year it generated sales of HK$1.5bn and EBITDA of HK$260m ($190 and $33m respectively; inc. JVs). The operations are extremely efficient with standardised and scalable chain of restaurants, central kitchens, speedy service and 8 restaurants with round the clock opening times. To illustrate, the average revenue per store is $4.5m (closer to $5m in HK and $4m China) vs $2-3m for global peers and $1-1.5m for the avg chain Cha Chaan Teng in HK; avg. sales of around $1,100/Sq. Ft.; 11-12 customer/seat turnover; ROIC on invested capital in high double digits etc, you get the idea.

TW has a very ambitious expansion plan for which they raised capital at the IPO (c. HK$795m or $100m). Mgmt. plans to increase restaurant count to over 80 by 2017. By 2015 they target to have 52 stores, implying 14 stores p.a. through 2017 (which could prove to be aggressive) mostly in China. Each store costs around $1.15m to build (with minimal maintenance capex), with average 1-2 months to breakeven and 18 months payback. I’m modelling 4 and 7 store openings for HK and China respectively p.a. by 2017 for a total count of 74 (39 in HK and 34 in China). Currently, HK represents the bulk of the business, but China has been gaining share and makes up c. 30% of sales.

The economics between HK and China are somewhat different. HK has longer avg. opening hours (19 vs 14 hours), higher turnover (11-12x vs 6x), which is compensated by higher avg. check size in China (RMB180 vs HK$90 in HK) given higher menu prices and targeting of higher income population, and higher square footage (7-10,000 Sq. Ft. vs 3,000 Sq. Ft in HK on avg.). Two points to add here on the prices and square footage: (i) TW increased avg. menu prices virtually every year and its prices even in HK are at a premium to other similar type restaurants and (ii) on the square footage mgmt. indicated that they plan on introducing smaller stores in China as a new operating model.

Now I noted above that the growth plan might be aggressive. TW’s key expansion target is China and within that Shanghai, which is one of the most competitive food and restaurant markets as you can imagine. TW has gone from having one store in 2010 to 17 currently however this came to the detriment of sales per store. Casual dining is exploding in China, however competition especially from chains such as Xinwang or Charme is heating up (no pun intended), which is impacting performance. The company is committed to not compete on price (it has the highest avg. check size amongst the chains) but on core values and expected to have a tough time with further expansion Shanghai. There is also an element of difference in customer preference and taste between the Shanghai/Sichuan cuisine vs the more tamed Cantonese. But Shanghai is not the only place in China with growth potential. TW operates in Shenzhen or Wuhan, which it could tap for further expansion. In addition to store count growth management is experimenting with other source of growth such as deliveries in HK, though there would naturally be some cannibalisation.

So this is all wonderful but let’s see if it’s cheap. The current share price following the HK market’s run up last week is HK$2.78, market cap of HK$4bn ($515m) and EV of HK$3.4bn ($440m), trading at 13x EBITDA. I’m estimating that by 2017, TW will have 74 stores (below guidance) with 39 in HK and 34 in China. I’m using two methods to estimate revenues: (i) avg. Sq. Ft. x avg. sales/Sq. Ft and (ii) avg. store count x revenue/restaurant. In the first instance the key assumptions are: (a) 3,000 Sq. Ft. in HK and 8,500 Sq. Ft. in China (declining to 6,500 Sq. Ft. by 2017 to account for mgmt.’s plan to introduce smaller restaurants); (b) avg. sales/Sq. Ft. HK$13k and c. HK$4k, for HK and China respectively. In the second method I’m assuming HK$36m and HK$32m revenue per restaurant for HK and China respectively. Both methods get me to HK$2.3-2.4bn revenue by 2017 and assuming a ramp-up to 17% EBITDA margins (below historical average) I get to HK$400m EBITDA. This implies a multiple of around 8.5x, which I believe is quite low. Based on TW’s and peers historical EBITDA range of at least 12x, the implied share price is HK$3.7 for a conservative 35% upside.  My estimates are fairly conservative: (i) below guidance and consensus restaurant count growth, (ii) below historical overall average sales/Sq. Ft. ($900 in my model vs $1,100 historically) and (iii) below historical EBITDA margins. In addition to the cheap valuation, the company has a dividend payout policy of no less than 30%, however this averaged 50% since the IPO. The forward yield is around 3%.

It would be remiss not to mention the massive share price decline during 2014. The company went public in 2012 at around HK$2.5 per share, eventually increasing to HK$5.6 by late 2013, dropping all the way down to HK$2.3 in mid March 2015. This was due to a combination of events: (i) secondary share sale of controlling shareholders to “increase liquidity in the market” at HK$5; (ii) resignation and then appointment of a CEO (one of the co-founders); (iii) slower Chinese expansion; (iv) slower SSSG in China and (v) increase in costs (especially rent in HK), impacting margins. As noted above the Chinese competitive environment is tougher, in addition growth can hurt margins in the early years as new stores are not up to the scale of the existing ones. There is no short term remedy for this but TW’s actions, such as increasing the number and efficiency of the central kitchens will eventually help, as well as the ramp up of the new restaurants.

On the governance issues, the secondary share sale caught investors by surprise. TW is a controlled company with 5 key shareholders (also co-founders and directors) owning 65% of the company currently, and they sold down 8% in January 2014 at HK$5.  The reason given was the standard “increasing liquidity in the market” but it’s certainly not positive when core shareholders are selling. The shares certainly ran ahead of themselves (over 2x from the IPO price) so the shareholders probably saw it as an attractive time to sell down. Then to compensate for the sale to a small extent in April 2014 as the price started to drop, core shareholders acquired 7m shares (0.5% of total) at around HK$4. In addition, there are related party transactions to consider where the company buys or leases properties from the directors.

The potential risks with the investment are: (i) slowing growth and store opening guidance; (ii) food safety issues – this has been increasing in China; (iii) increasing costs – labour, raw materials or property related.

In closing, I believe that TW is a high quality business, with a very unique brand, growth story and capable management, whose share price got beaten up bad. I think it’s worth taking a closer look at.

Fairway Group Holdings

I’ve been following Fairway (FWM) since their IPO in 2013 and boy has it been a wild ride. The company, founded by the Glickberg family, is a retailer of natural and organic groceries in the greater NY area and has been in existence since the 1930s. In 2007 a PE fund by the name of Sterling Partners acquired 80% of the company for $150m and in 2013 took it public.

The company IPOd with much fanfare and expectations at $13/share, reaching highs of $28, then falling all the way down to the $2s towards the end of last year. The reason for that: seriously high growth expectations that turned out to be too ambitious. When filing the S-1 the company had 11 stores (currently 15) and the plans of growing the store count by 3-4 annually. The stores were a mix between urban and suburban, naturally with a different set of economics. The urban stores are around 40,000 sq. ft. (gross), while the suburbans are 60,000 sq. ft. (gross). Growth plans (backed by consultants) saw the possibility of growing to 90 stores in the Northeast states and 300 nationwide.

These expectations were taken down to 2-3 stores annually, then to 1-2 and then they stopped giving guidance, all in the space of a year. In addition, the C-level suite was a bit of a revolving door with the board having gone through two CEOs until they hired the current CEO, Jack Murphy. In short, as far as the IPO itself is concerned it was a very successful one (for the original shareholders / backers) less so for the poor souls who bought in the following months.

Below is a snapshot of FWM vs some its competitors.

Source: Fairway Group

The new CEO has an impressive background in building grocery businesses, such as Earth Fare or Fresh Fields, amongst other businesses within a PE platform. He came out of retirement to take on the challenge of turning Fairway around. He is going back to basics – “Supermarket 101” (increasing SSS, better merchandising, inventory management etc) on the operations side and slowing down store expansion. The bleeding seems to have stopped but the turnaround will take some time for sure. I’d urge you to read the transcripts or listen to the conference calls pre and post his appointment. The tone is markedly different (for the better that is).

In terms of numbers, in the last full year (ended March 2014) the company generated $776m of sales and EBITDA of -$7m, and in the TTM sales of $800m and $3m EBITDA. While over the last five years (through 2014) sales have almost doubled, SSS was practically negative across all years and it hasn’t been better since 2014 either. This massive expansion in sales came from an almost 3x growth in sq. footage but at a cost of lower sales per square foot. Gross margins have bobbed around the 33% mark over the last five years, generally in line with comps. It’s also worth noting that given the losses over the last few years the company generated NOLs of $150m (per the last 10-K), with a 20 year life so they’ll not be paying taxes for a while.

If you dig through the financials, you’ll find that the company likes to report adjusted EBITDA, basically adding back every item they can think of as “one off”. Adj. EBITDA for the last full year was $49m, so as you can see there is quite bit of tweaking that goes on here (store opening and advertising costs, equity compensation etc). Some of it is fair, but for instance equity comp shouldn’t be adjusted for. For the last twelve months adj. EBITDA is around $40m with a 5% margin.

Looking at valuation, FWM’s current market cap is $260m and with net debt of $220m, you get to EV of $480m. There isn’t a long enough historical multiple trading range yet for FWM so triangulating valuation by using various comps is fair. On the high end you’ve the likes of Whole Foods or The Fresh Market with multiples of 10-14x (EBITDA margins of 8-9%) and on the lower end companies such as Safeway or Kroger with lower margins (4-5%) that traded historically at 6-8x. 

Based on an 8x multiple, the market is currently pricing $60m EBITDA for FWM (most likely adjusted basis), so one could argue that the shares are fair to overvalued based on near term results. FWM could be generating $70m EBITDA (on my estimates) in the near to mid-term due to improving margins (expanding private label sales, cost cutting, improving productivity etc), which is of course subject to the effectiveness of the turnaround. If this is the case multiple expansion is likely to follow. Using the $70m EBITDA and a multiple of 8-10x (high end of the low margin comps and low end of the high margin comps) you get to share price between $8-11 vs the current $6.

I’ve seen other research on FWM, which assume more generous earnings. You could argue that the new CEO has a great track record and has done these sorts of things before so my numbers could be on the conservative side. I’m OK with that, there are many things can go wrong and normally turnarounds turn slower than expected. I’d throw in here that (while I’m less familiar with the geography where FWM operates) it could be an interesting opportunity for Whole Foods to consider M&A with Fairway. It could be worth more to them considering that they could take out a large part of the costs.

There are considerations around corporate governance that's also worth flagging. FWM is a controlled company with a dual share class and the PE fund holds 92% of the super voting class B, while Howard Glickberg holds the remaining. Furthermore, the fund owns 28% of the class A shares as well. All in, they control 80% of the votes. Additionally, there are related party transactions that I don’t like such as FWM leasing properties from companies where Howard Glickberg has an interest. He is also the director of development and reports solely to the board of directors.

One word on the share price. Since the lows of October the price is up almost 3x so the shares had very good momentum behind them so far. Any pullback from here would be welcomed though.