Brenntag/Univar: clients could vote towards cope with their toes

Larger is best, proper? Incorrect, says activist investor PrimeStone. It opposes plans by the world’s largest chemical distributor to purchase its quantity two peer Univar. Germany’s Brenntag has not outlined phrases publicly. US-listed goal Univar is capitalised at over $5bn.

Prospects are sometimes taken with no consideration in large takeovers. Acquirers anticipate to extract “synergies” — price financial savings and advertising advantages — from them. However that relies on clients staying put. London-based PrimeStone is sceptical they’d achieve this if Brenntag mixed with Univar.

It’s straightforward to see why a deal appeals to Brenntag administration. Provide chain turmoil in the course of the pandemic boosted income. That impact is now fading and shares have been slowly deflating. A giant takeover may deliver with it the prospect to chop prices and push up margins.

However PrimeStone, which holds 2 per cent of Brenntag’s shares, thinks this logic is flawed. It believes a deal would as a substitute set off an exodus of consumers spooked by the chance to their provide chains of swapping two suppliers for one. Some would possibly defect to unbiased distributors. The activist says precisely that occurred after Univar acquired rival Nexeo in 2018, erasing some $220mn of natural ebitda within the years following.

PrimeStone, co-founded by ex-Carlyle executives, bases its views partially on the way in which chemical substances are distributed. This differs between bulk chemical substances and speciality chemical substances. The latter are typically distributed by way of unique contracts. The previous are offered by means of extra of a free-for-all. It’s right here that buyer threat is concentrated.

The activist believes Brenntag ought to cut up itself right into a bulk chemical substances group and a speciality chemical substances firm. Pure play teams of the latter kind demand considerably greater rankings; IMCD and Azelis commerce on 22 instances ahead earnings towards Brenntag’s 9 instances.

Lex calculates that spinning off speciality chemical substances would add round a 3rd to the present group worth of €8.8bn. Over two-fifths of Brenntag’s income originate from this division. Development may then move from smaller bolt-on acquisitions. Dimension does matter — however it may be achieved with out an costly and dangerous takeover.