Activist Pushing for LSB Split Takes on Family: Real M&A

A little-known activist shareholder is so convinced LSB Industries Inc. is undervalued that he is taking on the controlling family and the chairman who founded the chemical supplier 45 years ago.

Engine Capital LP, founded last year by Arnaud Ajdler, wants the $868 million company to spin off its air conditioning and heating business, place some assets in a more tax-favorable structure and replace board members. LSB, which gets about 40 percent of revenue from the climate-control unit, trades for 7.2 times profit. That’s about half the multiple of climate-control peer AAON Inc., showing the potential value in a breakup of LSB.

“Spinning off the climate-control business probably makes sense because there’s no connection between the two businesses,” said Robert Longnecker, founder of Santa Monica, California-based Jovetree Capital LLC, which owns the stock. “I like what the activist is doing, but the chances of them having success are probably pretty low.”

The New York-based investment firm is up against a board and management team that control 19 percent of the voting power. Chairman and Chief Executive Officer Jack Golsen, his family members and two other executives hold six of the 14 board seats. While Engine Capital estimates its recommendations would almost double LSB’s stock price, the part of the plan that involves creating a master limited partnership for some chemical plants may not be feasible, said Avondale Partners LLC and BCMI Research.

Engine Capital

Engine Capital said LSB’s stock price should be between $65 and $75. The shares closed at $38.53 yesterday.

“What we are saying is that the board should form a special committee of truly independent directors to look at these different options,” Ajdler said in a phone interview yesterday. “We believe they would create value, and the company should evaluate them, as well as other alternatives, with a fresh set of eyes. Only then can they make the right choices for the benefit of all of the shareholders.”

Ajdler founded the New York-based firm in early 2013, and it has about $100 million in assets under management. Ajdler, who previously worked at activist investment firm Crescendo Partners, declined to reveal the size of his stake in LSB.

His track record at Crescendo includes pushing for the sale of Michael Baker Corp., which was then acquired for almost $400 million. At Engine Capital, he has urged Toronto-based Vitran Corp., a trucking company with a market value of $106 million, to sell itself.

‘Enhancing Value’

LSB said its board will evaluate Engine Capital’s proposals with input from the management team.

“We are disappointed that Engine Capital has decided to publish this letter, especially in light of our ongoing dialogue,” LSB said in a statement last week. “LSB welcomes open communications with its shareholders and values their input toward the shared goal of enhancing value.”

A representative for the company declined to comment further.

If Oklahoma City-based LSB rejects the ideas, Engine Capital said it’s prepared to nominate five board members and rely on garnering support from other shareholders. After rising 5 percent in two days after the activist’s letter was disclosed Dec. 30, the stock has since fallen for four straight days, erasing the gain.

Today, the shares declined for a fifth day, falling 0.8 percent to $38.24.

Board Members

LSB’s staggered board of 14 directors is elected by a plurality and includes four family members -- Chairman Golsen, who was 84 as of an April filing, his two sons and his brother-in-law -- as well as two other LSB executives. The board’s average age was 70 as of the April regulatory filing, versus about 63 for companies in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg.

In the 12 months that ended Sept. 30, LSB generated about $707 million of revenue, of which about 59 percent came from nitrogren-based chemical products used in the agricultural, industrial and mining industries.

The chemicals unit has faced a series of operational setbacks. In May 2012, a blast at an LSB plant that makes nitric acid destroyed a factory. Later that year, an ammonia plant was damaged after a pipe ruptured.

Last year, production was halted at two plants for five months because of planned and unplanned maintenance. One was taken out of service again in October and not returned to production until December.

Stock Performance

“I’m not surprised that an activist approached them,” Daniel Mannes, a Philadelphia-based analyst for Avondale Partners, said in a phone interview. “The operational issues at a number of their plants have been very sizeable, which has caused the stock to be a poor performer versus some peers.”

LSB’s stock rose 10 percent last year through Dec. 27, before Engine Capital’s letter. That trails the 14 percent gain at CF Industries Holdings Inc., one of its closest fertilizer competitors, and the 33 percent advance in the S&P Small Cap Chemicals Industry Index.

Breaking up the company may make sense because its two businesses don’t have any synergies, according to Mannes. Spinning off climate control would allow it to fetch a valuation more in line with peers such as AAON, he said.

LSB’s enterprise value yesterday of $1.2 billion was equal to 7.2 times analysts’ estimated 2014 earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show. AAON trades for 14.5 times.

High Valuation

A breakup may be difficult because at that multiple, LSB’s climate-control business would be a relatively small company with a market value of less than $500 million, Mannes said.

Engine Capital estimates LSB’s chemical plants should be valued at more than $1.2 billion -- higher than the company’s total market value -- and placed into an MLP.

That valuation is too high, according to Chris Damas, an analyst at BCMI Research in Barrie, Ontario, who specializes in the agricultural, chemical and energy industries and follows fertilizer MLPs such as CVR Partners LP and Rentech Nitrogen Partners LP.

MLPs are exempt from federal income taxes and pay most of their cash to owners of limited partnership units, which are publicly traded. They typically are made up of predictable businesses like pipelines, rather than more volatile operations like LSB’s chemicals, Damas said.

“I don’t think the MLP idea has wings,” Damas said in a phone interview. “It’s not reliable enough to build a steady income stream. The financial engineering that the activist alludes to is just not available.”

Engine Capital still may win the support of enough shareholders to get its board slate elected, and management could respond by buying back stock or paying a dividend, Damas said.

“The activist in LSB may be small, but it could get things going like a lightning rod,” he said. “If LSB decides on doing nothing, Engine Capital may very well get some nominees.”

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