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Friday, June 13, 2014 - 09:30
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Friday, June 13, 2014 - 09:30

Is This The Next Blockbuster Deal For Bill Ackman?

Friday, June 13, 2014 - 9:30am

Bill Ackman takes big, concentrated positions with his hedge fund Pershing Square Capital, and 2014 has been a winning year for him. According to HSBC, Pershing Square is the top-performing hedge fund this year, with a gain of 22.5%.

Not bad for half a year's work.

Compare this to performance of his peers David Einhorn and Dan Loeb: Einhorn's Greenlight Capital and Loeb's Third Point hedge fund are up only 5.4% and 4% this year, respectively, compared with a 4.4% gain for the S&P 500 Index.

Unlike Loeb and Einhorn, Ackman appears to be more of a dealmaker. He likes to get his hands dirty, providing not only money but also strategy.

His most successful deal was Canadian Pacific Railway (NYSE: CP), where he launched a proxy contest and replaced the board and directors and the CEO. Ackman was instrumental in bringing former CEO Hunter Harrison out of retirement, and the results speak for themselves. He tripled his $1 billion investment in the company in under three years.

In Ackman's latest deal, he has teamed up with Martin Franklin, chairman of Jarden (NYSE: JAH), and billionaire Nicolas Berggruen in Platform Specialty Products (NYSE: PAH). Platform Specialty was formed after the three created an acquisition vehicle to buy specialty chemical manufacturer Macdermid for $1.8 billion.

This will be the second deal for the trio. Their previous deal was returning Burger King Worldwide (NYSE: BKW) to the public markets after it was taken private by 3G Capital. Pershing Square still owns 10.9% of Burger King Worldwide, and Franklin owns 1.4 million shares.

Macdermid's products are used in the electronics, metal and plastic plating, graphic arts, and offshore oil production and drilling industries. Last year, Macdermid reported $742 million in sales and $180 million in earnings before interest, taxes, depreciation and amortization (EBITDA), with an EBITDA margin of 24%.

Macdermid CEO Daniel Leever will run the day-to-day operations, and Ackman and Franklin will plot strategy and look for acquisitions. They're already at work in the acquisitions department.

In April, Platform Specialty purchased Chemtura AgroSolutions from Chemtura Corp. (NYSE: CHMT) for $1 billion. This acquisition gives Platform Specialty a leading and fast-growing global provider of agrochemicals and seed treatment products.

Chemtura AgroSolutions also has a global footprint as its products are sold in more than 100 countries. Its portfolio encompasses seed treatments, insecticides, herbicides, and plant growth regulators, among others. Over the past three years, Chemtura AgroSolutions has introduced over 100 new products.

The acquisition is expected to immediately boost Platform Specialty's earnings by 35%. Last year, Chemtura AgroSolutions had sales of $449 million and EBITDA of $101 million, which has grown an average of 15% a year from 2009 to 2013.

The good news for Platform Specialty is that this steady growth came organically and without any acquisitions. The business is very similar to Macdermid's in that it requires minimal capital investment to maintain its growth: Last year, Chemtura AgroSolutions' capital expenditures amounted to less than 2% of its annual sales.

Ackman's Pershing Square is the largest shareholder of Platform Specialty, with a 27% stake. PAH is up nearly 100% since Ackman bought into the company, but it could still be a great value. Platform Specialty has also attracted the attention of billionaire and Tiger Cub John Griffin, whose Blue Ridge Capital owns 6% of the company.

Risks to Consider: Platform Specialty is looking to grow through a series of acquisitions. This will require the company to borrow a lot of money and expand its balance sheet. Acquisitions require near-perfect execution, and any missteps could prove costly to shareholders. However, Chemtura AgroSolutions' management team will also join Platform Specialty, which should be an asset in future acquisitions.

Action to Take --> Buy shares of Platform Specialty Products with a price target of $39 for upside of 50%. This would put PAH trading at 3.8 times book value, which is up from its current multiple of 2.8 but less than the industry average of 4.3.

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Marshall Hargrave does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.