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Engine Capital

Second shareholder asks Brenntag to split

Engine Capital, an investment firm with a 1% stake in Brenntag, has become the second to advise the company to separate out its two businesses. PrimeStone, which owns 2%, had urged similar action in December, when Brenntag itself was in discussions with Univar Solutions about a possible merger.

In an open letter to the supervisory board, Engine managing partners Arnaud Ajdler and Brad Favreau said that the state of the market and the firm’s “its strong supplier relationships, attractive and growing end markets, the latent and unrealised value of the Specialties business” give it many opportunities to increase shareholder value. However, it is not currently “achieving its full potential”.

Separating out certain aspects of Brenntag Specialties from Brenntag Essentials was a step in the right direction, but Engine believes that Brenntag Specialties “will continue to lag its peers and will be unable to optimise its operating performance” as part of Brenntag and its shares will not match those of other pure-play speciality firms because of the ‘conglomerate discount’ investors assign to Brenntag.

A full split, Engine argued, will enable Brenntag Specialties to achieve its full potential as a stand-alone entity and help unlock long-term value. As it stands, the division’s organic growth of 26.4% over the past 21 months has lagged behind those of pure-play speciality distributors Azelis (37.6%) and IMCD (39.9%). To address these issues and enhance long-term shareholder value, Engine asked the board to:

* Publicly commit to prioritising a separation and provide a timeline for it

* Establish a meaningful share repurchase programme to take advantage of the current undervaluation and the 1.3x debt-to-EBITDA ratio

* Add a shareholder representative with relevant capital allocation, investing and valuation analysis experience to the supervisory board

Engine cited the “surprising and unfortunate” move on Univar, which led to a 17.7% fall in the share price over three weeks. Although it was soon abandoned, “the mere fact that these conversations took place indicates that leadership was ready to consider a transformational and risky transaction just weeks after specifically outlining plans to focus on small tuck-in acquisitions during its November 2022 Capital Markets Day”. B

ecause the market approaches needed in speciality chemical distribution are different to those in commodities and require a different skill set in sales. “The feedback we received from numerous industry sources is that specialties salespeople are more attracted to pure-play distributors like Azelis or IMCD, rather than Brenntag, which is perceived as having less of a specialties DNA,” Engine concluded.

In addition, because Brenntag is not seen as a specialities distributor, there have been numerous instances where owners of speciality chemical distributors were simply not interested in selling to Brenntag, despite Brenntag Specialties operating more independently. Likewise, many chemical manufacturers prefer pure-play speciality distributors.

For all these reasons, Engine concluded, it believes that Brenntag would trade at approximately €140/share by the end of 2024, double the current share price, with a spin-off. They asked for the board to meet with them to discuss these issues.

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