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‘Activist’ shareholder demands change at Elementis

Gatemore Capital Management has published an open letter to John O’Higgins, chairman of the board at UK-based speciality chemicals company Elementis, stating that there is “an urgent need for change”. This echoes a letter from another ‘activist’ shareholder in late 2023.

Elementis mainly supplies the personal care sector, notably cosmetic and antiperspirant actives – it is the world market leader in the latter field. 85% of its products are of natural origin. Coatings and paper are other key markets.

Gatemore, which has a 0.6% stake, said that there is a between the firm’s “fundamental strength” and its “persistently weak share price. Having already engaged to this effect, it said that is going public about how Elementis should act “to rebuild investor confidence and unlock significant value for its shareholders”.

According to Gatemore, Elementis “is an attractive business that has lost its direction” and should be doing better, based on various factors:  the importance of rheology modifiers in product formulation; customer loyalty, especially in coatings; owning a hectorite mine in California, which is a key competitive advantage; expertise in rheology modifiers with market-leading R&D capabilities; and consistently strong historical gross profit margins.

Nonetheless, its performance has been very weak and this, Gatemore said, is largely self-inflicted. This it blamed above all on CEO Paul Waterman. Since he took over in 2016, Elementis has total shareholder returns 86% lower than its peers and 76% lower than the FTSE 250, despite three takeover approaches boosting the share price.

In particular, Gatemore cited: poor capital allocation with a $650 million net spend on M&A, over a half of its current entire market capitalisation, most obviously overspending on Mondo Minerals; repeated operational underperformance; and rejecting three takeover approaches from Minerals Technologies and Innospec in 2020-1.

In addition, Gartmore said, “Elementis’ self-help measures are woefully inadequate”. The $20 million ‘Fit for Future’ cost-saving programme announced at a Capital Markets Day in November 2023 could and should have been implemented earlier, while analysts remain sceptical abut the management’s ability to deliver its EBIT targets. Gatemore concluded by asking the company to:

* Accelerate and confirm the details around the programme

* Replace Waterman and appoint new non-executive director Heejae Chae to lead the search process

* Conduct a strategic review of the portfolio with the aim of refocusing and making it more attractive for a strategic buyer

Gatemore added that it had spoken to other shareholders and believed that most were in agreement. Furthermore, it claimed to have “a strong track record of unlocking value in UK small- and mid-caps for all shareholders”, citing DX Group as an example.

Elementis did not directly respond. Instead, it said: ‘The board continues to believe that shareholder value is best driven by a focus on delivering the substantial actions that are currently being progressed at pace throughout the business and that underpin progress towards the 2026 targets of 19%+ operating margin, over 90% cash conversion and over 20% return on capital, generated by $90 million of above market revenue growth and $30 million cost savings.”

In November 2023, another activist, Franklin Mutual Advisers, had published a similar open letter O’Higgins, calling for Elementis to put itself up for sale. It accused the company of “a shocking amount of shareholder value destruction”, mainly from buying SummitReheis and Mondo Minerals. Elementis declined, saying it did not think this to be in shareholders’ best interests.

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