FMC – Can It Survive the Consolidation Wave? Should It Try?

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Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

May 23rd, 2016

FMC – Can It Survive the Consolidation Wave? Should It Try?

  • FMC has been in focus recently as a plausible target in the wave of consolidation in Agricultural Chemicals
    • Defensive move by MON or consolidation from someone such as BASF – today’s MON/Bayer news only suggests the overall game is more active and urgent
  • Company has struggled over the past two years
    • Earnings are down partly due to the company’s outsized Brazilian exposure in Ag Solutions, its biggest segment; guided 2015 to an initial range of $3.50-$3.90 per share – actual results came in closer to $2.50 per share
    • Cheminova appears to be poorly integrated at this stage and fixing this may be a positive
    • ~20% relative outperformer in 2016 but ~50% off the highs of 2014
  • Potentially worth more in pieces – sum of the parts suggests upside – buyout possible
    • Ag (69% of sales) – very Brazil heavy (40% of segment) prior to Cheminova which expanded exposure in Europe and Asia
    • Health & Nutrition (24% of sales) – stable 30% EBITDA margin business, high barriers to entry given pharmaceutical qualification requirements
    • Lithium (7% of sales) – consolidated market structure, strong demand trends for specialties
      • Company claims a technology edge in lithium hydroxide, the primary raw material for electric vehicle batteries
  • 2017 estimates do not currently reflect any ag improvements (from the market itself and likely from better integration of Cheminova) or continued growth in lithium
    • Applying the potential multiples in Exhibit 1 to ’17 estimates in a simple sum of the parts calculation suggests ~30% upside for FMC
  • Bottom line, we think FMC is an intriguing alternative, as the odd company out in a changing Ag landscape and we would own the stock
    • Ag business’ CPC focus better complements MON’s product line versus BASF or Bayer
    • All three of FMC’s businesses could find a home in BASF’s portfolio
    • Based on recent multiples for acquisitions in the Chemicals space, FMC could command a 20-30% premium over its current value

Exhibit 1

Source: Capital IQ, Company Presentations, SSR Analysis

Overview

In recent research on the activity in the Ag Chemicals space we highlighted FMC as a likely takeout candidate – resulting either from a defensive move by MON or a consolidative consolation for the left-out German company in potential MON/BASF or MON/Bayer deals.

Here we explore FMC further to identify what parts of its portfolio – Exhibit 2 – might or might not make sense in the hands of potential ag-motivated acquirers, and what value those segments could bring.

Exhibit 2

Source: Capital IQ, SSR Analysis

Exhibit 3

Source: Capital IQ, SSR Analysis

Segment Reviews

Ag

FMC’s Ag business is exclusively crop protection chemicals (herbicides, insecticides, fungicides) – BASF (~90% CPC) and Bayer (~80% CPC) are its most similar comps from a product offering perspective.

Historically FMC Agricultural Solutions was heavily weighted to the Western Hemisphere, with outsized Brazilian exposure relative to the industry. Brazil remains 30% of segment sales, and an additional 10% is generated in other Latin American countries. Cheminova helped diversify the geographic exposure, but the added Asian (and to a lesser extent, European) geographies typically offer lower margins and help to explain the contraction in margins in 2015 (currency also a factor). On product lines, Cheminova was also focused mainly on the crop protection side and FMC has highlighted the improved fungicide portfolio post-deal.

Exhibit 4

Source: Capital IQ, SSR Analysis

Exhibit 5

Source: Capital IQ, SSR Analysis

The Cheminova acquisition has diversified the Ag foot print both from a product and geography perspective but it does not look like FMC has really begun to drive potential integration synergies yet and if the company has they have been more than offset by currency and Brazil. We see this as an opportunity for a possible acquirer with good integration and operational skills and may present some significant EBITDA upside. It almost appears as if FMC did not have a robust 100 or 150 day plan here and so this presents opportunities for an acquirer. In the company provided schematic in Exhibit 6 there is a summary of what Cheminova brings to the existing FMC Ag portfolio and this suggests lots of scope for cost rationalization. Cheminova does increase FMC’s R&D and product development capability but it does not put the company in the discovery game – regardless, the addition should make the portfolio more, though in some cases only slightly more, attractive to potential buyers.

Exhibit 6


Source: Company Presentations

Health & Nutrition

From a margin perspective this is FMC’s most profitable and consistent business – Exhibit 7. Its largely non-cyclical end markets show good growth potential – Exhibit 8 – and the significant regulatory compliance requirements associated with food and pharma products result in high barriers to entry and defensible positions within the industry.

FMC has share leading products in nutrition ingredients (texturants and stabilizers), health excipients (MCC tablet binders) and functional health ingredients (alginates for anti-reflux, and omega-3s for pharma and dietary supplements).

Segment strategy is predicated on maintaining tier one supplier status. Innovation is a secondary priority, and comes at a local, regional level – FMC Health & Nutrition has 13 R&D facilities spread across North and South America, Europe, and Asia.

Exhibit 7

Source: Capital IQ, SSR Analysis

Exhibit 8

Source: Company Presentations, SSR Analysis

Publicly traded competitors with product overlaps include DSM (Holland) and DuPont’s similarly named Nutrition & Health segment – Exhibit 9.

Exhibit 9

Source: Company Presentations, SSR Analysis

Lithium

FMC maintains that its lithium hydroxide business has a relative technology edge – this is an area expected to see strong demand growth from increased electric vehicle penetration – Exhibit 10. Only a small number of producers are able to produce battery grade hydroxide consistently and in volume. If this is the case then this business has increasing value – not to the two largest players (ALB and SQM) because of market density, but to plenty of others who might like a toe hold in the business. We would include some of the big battery users on this list, such as Tesla, who might like some manufacturing capacity to help in negotiations with other large suppliers.

Exhibit 10

Source: Investing News, Synergy Files, SSR Analysis

All three of the major lithium suppliers source their material from the Andes Mountains region. FMC’s source is the Salar del Hombre Muerto in Argentina – “Dead Man’s Salt Flat”. SQM and ALB have rights to the Salar de Atacama in Chile. The brine evaporation production process is low cost but creates a ramp up problem as each batch takes 18-24 months.

SQM lists Chinese producers as accounting for ~40% of global supply – Exhibit 11. Most of this supply is based on spodumene ore that is geologically purer than lithium obtained from brines, but has a much greater cost of production. FMC believes only ALB is a material competitor for its specialty lithium products, and generates substantially more of its revenues from specialty applications than the industry as a whole – Exhibit.

Exhibit 11

Source: Company Reports, SSR Analysis

Exhibit 12

Source: Company Presentations, SSR Analysis

Exhibit 13

Source: Company Presentations, SSR Analysis

FMC has a modestly less competitive cost position versus other brine based lithium producers, but even with an added cost related to the Argentinian peso its capacity is lower cost than Chinese spodumene ore based lithium production – Exhibit 14. FMC presentations have indicated industry utilization rates below 50% – even demand grows steadily through 2020, capacity additions are expected to keep operating rates under 60%.

Exhibit 14

Source: Company Presentations, SSR Analysis

Exhibit 15

Source: Capital IQ, SSR Analysis

Exhibit 16

Source: Company Presentations, SSR Analysis

Upside to Potential Breakup/Buyout

The sum of parts piece is interesting with only BASF likely to want the whole company – others would likely want to divest parts.

Exhibit 17

Source: Capital IQ, Company Presentations, SSR Analysis

As a straight purchase, based on recent multiples in the Chemical space, FMC would likely command a 20-30% premium to its current value.

©2016, SSR LLC, 1055 Washington Blvd, Stamford, CT 06901. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.

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