PAH Update: Thoughts Regarding CEO Mr. Dan Leever's Resignation
On October 23, 2015, Platform Specialty Products (NYSE:PAH) announced that the CEO Mr. Dan Leever indicated his intention to retire from the Company once a suitable successor has been hired.
In the announcement, Mr. Leever noted:
this is the best time for the business and me personally to retire from the responsibilities involved with day to day operations. I believe in Martin's vision for Platform and am proud that I have been able to contribute to its past success and help lay a strong foundation for its continued success. While I'll surely miss the day to day interactions with the incredible employees who lay the foundation for all of Platform's success, I strongly believe that it is the right time for a new person to take over the reins of day to day operations and to be able to set out a clear execution strategy for the next years of consistent, profitable growth."
On October 26th, PAH announced an Investor Conference Call for Tuesday October 27 at 8:30AM [dial (855) 357-3116 (domestic) or (484) 365-2867 (international) and provide the Conference ID: 68540178]
Framework for thinking:
1) Overview of Mr. Leever: Mr. Leever worked at MacDermid in various roles for over 30 years but ultimately as the CEO and Chairman for over 15 years. MacDermid is and was a Specialty Chemicals business focused on the consumer electronics and automotive sectors with a Printing solutions business. Over the last 20 years, the MacDermid operations remained stable with EBIT ranging between approximately $80mm and $100mm and long-term organic growth of approximately 3%. MacDermid did not execute M&A to achieve the growth. In the last decade, we've only found the acquisition of Autotype for $90mm in 2005. Mr. Leever participated in the take private (management buyout) of MacDermid in 2007/2008. In 2013, Mr. Leever agreed to sell MacDermid to Platform Specialty Products, instead of what appears to have been an IPO (see SEC filings) and took on the role of CEO of PAH. Mr. Leever is in his mid-60s.
2) Mr. Leever's (publicly known) financial considerations: As part of the MacDermid sale to PAH, Mr. Leever agreed to a substantial equity stake in PAH as part of the transaction rolling over his ownership in MacDermid into ownership in PAH. In addition, public filings and comments by Mr. Leever on investor calls highlight there is an approximate $100m cash incentive for MacDermid obtaining several operating targets. There is not much disclosure on the targets other than a few mentions of a target EBITDA.
Comments from the Investor Day in March 2015 (notes from call; apologies in advance if any words are not perfect):
"Now what you would expect … is some sort of management incentive program … substantial payout based on performance… In the case of the MacDermid acquisition, the management team got a 7-year opportunity. So we have a performance set of criteria over 7 years. And at the end of 7 years, we have the ability to make a cash payment at the end of 7 years. There were no shares at all involved in that. It's just a cash payment. A nice big one, I hope."
3) Mr. Leever's ownership in PAH: Mr. Leever owns approximately 6.9mm shares (2.6%) of PF PAH which is worth more than an estimated $80mm. In May 2015, Mr. Leever sold approximately 370,000 shares in PAH (at approximately $27 a share). During the Q1 2015 PAH investor call, Mr. Leever noted in regards to the sale of shares
"You'll note that I sold some shares, and I'd like to say that you can't build a house with stock certificates. And I rolled overall my 100% of my stock in 2006. I rolled over 100% of my stock again in 2013. And my wife wants a house, so I told her I'd sell some stock to buy her a house. Really that simple.
No diversification or anything like that. Just it's a big house, that's all." (Please note wording might not be perfect as comes from notes taken during call).
4) Q2 2015 (Aug 13, 2015) Comments by Mr. Leever regarding state of PAH and the future opportunity:
"Every day we are seeing new opportunities to create more efficient businesses which we're fully pursuing and in all angles."
"As I said in our last call, bidding our synergy targets what dictates our priorities and this remains true today. We have management capacity…"
"We have significant additional leverage to pull, to further improve our earnings in cash flow, we are in the early days of the Ag integration, I'm confident this business will perform according to our expectations especially in the medium to long term and our business effectiveness initiative only provides upside. I look forward to updating all of you on future calls and with that happy to take your questions."
(please note words may not be perfect as taken from notes during the call)
5) Departure of Mr. Wayne Hewett. On August 28, 2015, PAH announced Mr. Hewitt tendered his resignation "to pursue other career opportunities." On September 1, 2015, Klockner Pentaplast announced Mr. Wayne Hewett was appointed CEO effective immediately. On March 2015, PAH Investor day, Mr. Hewett noted friction between himself and Mr. Leever:
"By the way, Dan and I are very different. There are a couple of things that we see eye to eye on…" (notes from investor call March 2015 apologies if wording not perfect)
"When we take a look at product portfolio, when we take a look at allocating capital, when we look at allocating resources, any kind of decision that we have to make internally aligns here. To be clear, there was no confusion to any one in the organization about what the focus on if you have to make a choice. And by the way, Dan and I, we're going to make sure top side that we do things to make sure that if anybody does get confused, that they get unconfused very quickly."
6) Comments by Mr. Leever regarding Mr. Hewett's departure:
"It was his decision. I don't know where he's going. Just to give you a little bit of background, Platform is very much a collaborative, interdependent management structure. And when you look at Martin and Martin's team and myself and Ben and Frank, we really all work in an area. It's a little bit like a private partnership where we sit around the table and we see who has the expertise and the capacity to work on a certain thing from time to time."
7) Mr. Frank Monteiro's role shift. On August 12, 2015, PAH announced Mr. Monteiro would shift from CFO of PAH to COO of the Performance Applications Division which includes MacDermid. Mr. Monteiro joined MacDermid in 1998 and was the CFO at the time of the MacDermid MBO.
8) Ms. Larissa Siegel joins PAH as VP of Global Business effectiveness. Ms. Siegel previously worked at Burger King under 3G capital (Mr. Franklin and Pershing Square were both involved in Burger King investment with 3G).
1) Who is allocating capital across PAH and is the allocation of capital process changed by the departure of Mr. Leever.
2) What is Mr. Franklin's role at PAH and how is it different to his role at Nomad Foods?
3) Who is sitting at the PAH "table" Mr. Leever mentioned on the Q2 earnings call? In Q1 2015, there was Mr. Franklin, Mr. Leever, Mr. Monteiro and Mr. Hewett. Mr. Leever, Mr. Monteiro, and Mr. Hewett are no longer at the table. Two new potential members include Mr. Khattri and Mr. Gliklich.
4) How did Mr. Leever go from (1) being excited about the long-term future of PAH, integrating the Alent acquisition (which may well not close before his departure), achieve all of the synergies from the various M&A transactions, and achieving the 2020 targets to (2) that this (October 2015) is the best time for him to retire. Is Mr. Leever sick and if so is there a chance he would come back to his role when healthy?
5) Who will select the successor to Mr. Leever? What is PAH's framework in seeking a new CEO?
6) What are the frictional costs of the senior team departures. In the Arysta proxy, there were comments about the severance which would be paid to Mr. Hewitt based on the date of departure. Potential severance payment for Mr. Hewitt departing from PAH within approximately 3 years was $5mm and if after 3 years or so substantially more ($25mm). (disclaimer: please note I don't have the exact language easily at hand and am pulling this from my memory which could have some flaws).
7) What are the cash costs to PAH of Mr. Leever departing?
8) How does Mr. Leever's departure impact the lump sum MacDermid 2020 incentive cash payment. Will the lump sum be increased or decreased for any purpose?
9) Does Mr. Leever have a non-compete or a garden period of any kind. Mr. Hewett joined a new company in the plastics sector within a week of resigning from PAH. Can Mr. Leever join another company in the next 5 years, or alternatively, is Mr. Leever stating he is looking forward to retiring and never working again.
10) What happens to Mr. Leever's shares in PAH if anything at all? Is Mr. Leever subject to a share selling lockup through 2020 (i.e. Mr. Leever can't sell any shares in PAH until 2020)
11) Is PAH still looking to hire a President of Agricultural solutions?
12) Is PAH considering changing the PAH founders' incentive compensation structure by, for example, increase the base price from the IPO price to the blended equity issuance cost (estimated $13.05 per share)? Alternatively, is PAH considering a change in the incentive compensation whereby the incentive shares are clawed back if the PAH stock price falls below the blended equity issuance cost ($13.05 per share).
In less than 24 months, Mr. Leever and the MacDermid team which took the senior leadership roles at PAH, have executed an estimated $7bn more M&A than they did in the last 30 years and have moved from a Specialty Chemicals sector to the Specialty Chemicals and Agricultural Solutions sectors. MacDermid was a sub $1.3bn public company when Mr. Leever and the team took the company private in 2007/2008. PAH is currently a $10bn public company. The AgroSolutions business has substantial operations in Brazil with currency headwinds (and possible tailwinds in the future).
From MacDermid's perspective, there has been a large change in scale, operations, and geographies. It is possible that the MacDermid team is not able to handle the additional and new requirements.
From PAH's perspective, what has changed? The MacDermid leaders who became PAH leaders have departed/changed and Mr. Hewett one of the key acquired "people" resigned abruptly. Mr. Franklin and Mr. Leever's constant commentary on how M&A transactions are primarily about acquiring the right people appears to be either untrue or alternatively PAH has failed in its philosophy of finding and acquiring the right people.
The Chairman and the key investors (sources of financing) have not changed and have significant collective powers. Mr. Franklin, Pershing Square, Permira and Cevian are the key investors who have influence over the forward path of PAH. In addition, each of the above shareholders has significant operating history with strong ties to senior management leaders. We estimate that Permira hired Mr. Hewett and as a result, we estimate that Permira can find a replacement for Mr. Hewett, as it would have had to do had Mr. Hewett departed before the sale to PAH. Mr. Franklin and Mr. Pershing have a long-term operational history across various industries and investments and access to numerous senior leaders. In addition, each works or has worked with 3G capital which also should have a pool of strong senior leaders.
The MacDermid, Alent, OM, Chemtura Agro, Arysta and Agriphar operations have not changed.
Mr. Leever is a significant PAH shareholder (to our knowledge) and is more incentivized than many public shareholders to help PAH succeed. While Mr. Leever sold 370,000 shares in PAH in 2015, he still has over 6mm shares.
Ultimately, the PAH operations have not changed and the key owners have not changed. The key owners have the most money at stake (Pershing estimated cost basis of $14 per share, Permira estimated cost basis of $27 per share, and Cevian estimated cost basis of $25 per share) in PAH and several are highly incentivized to achieve the valuation they bought into PAH at.
We look forward to learning more about PAH during the PAH call tomorrow morning.
Disclosure: I am/we are long PAH.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.