WestRock’s Ingevity Spin Pushed Back To May

Wall Street loves spinoffs, but these transactions are hardly simple affairs to execute. There is a reason most of them take more than 9 months to consummate. After pushing off the expected completion date of Ingevity’s spinoff again, it seems WestRock (WRK) is learning that fact the hard way. The specialty chemical spinoff is now expected to be completed in May of this year as opposed to during Q1 as earlier announced.

For a little history on this matter, a specialty chemical spinoff was pushed on MeadWestVaco by Starboard Capital and the company eventually acquiesced. Shortly thereafter, the company merged with Rock-Tenn which pushed off the timing a bit. The plan was still to complete the transaction within 2015, but that got pushed to Q1 2016. Now, it’s a bit further out, due to what CEO Steve Voorhees calls, ‘the inherent complexities of the separation process’. Not surprisingly, this rather vague explanation received some attention during the Q&A session (all quotes taken from CapIQ transcript of January’s Q1 Conference Call):

Anthony Pettinari

Okay, that’s helpful. And then just with Ingevity, you mentioned complexities that are pushing the spin out a bit. Could you give any color there? I mean, are those legal issues related to the transaction that are taking a little bit more time than you expected? Or is it kind of choppiness in the capital markets or are they complexities with separating the assets? Just wondering if you can give any color there.

Steven C. Voorhees

Complexities are by nature are complex. If I had to pick one which was, I guess, a little bit surprising to me it’s the — I guess, the step plan to put everything in place with a number of strong [ph] entities and U.S. entities. I think that has just required a lot of thought. There’s a lot of tax implications to that, and if I had to pick one, that would be it. But there’s several of them.

‘Complexities are by nature are complex’ – deep. Seriously, gotta love that response. Basically, it seems the transaction may have been trickier from a tax perspective than initially anticipated, but those issues seem to have since been resolved as Mr. Voorhees noted the recent receipt of a private letter ruling from the IRS on the transaction.

The specialty chemical business has been struggling of late though and the company was forced to take an impairment charge of $478m against the unit in response to the ‘changing market conditions and lower comparative market valuations for companies in their peer group’. Given the struggles, Mr. Voorhees was asked about potentially delaying the spin further and waiting for better market conditions:

Mark W. Connelly

Steve, you pushed back the timing of Specialty Chemical, but what’s the rush? I mean, we’ve certainly seen another big chemical business spun recently when it was down and the shareholder situation didn’t turn out real well. I guess I’m just wondering how do you figure the balance between the desire to clean up the portfolio quickly and the need to protect shareholders in such an uncertain market?

Steven C. Voorhees

I’m glad you asked that question because we’ve gone through and done, I think, a fair amount of thinking about that question ourselves. I think I’d start with we’re a paper and packaging company. We’re not a specialty chemicals business, so the business does not really fit with our portfolio. We have put in place, I think, a very strong management team, and the business is going to perform better on its own than it would be as part of WestRock. I think you can go through the alternatives, and I think the spin makes the most sense. You could say, well, maybe I could look at some other alternatives, but we just think this is not for the shareholders. And for WestRock it’s the most effective thing for is to do. I think going to May, I think it’s going to help team get off to a good start and they are going to be able to put together, I think, a very compelling story for investors on the value of Ingevity.

The analyst appears to be referring to Chemours (CC), the recent spinoff from DuPont (DD), whose shares have tanked during this tough market environment. The spin also cost CEO Ellen Kullman her job. The shareholder situation was a bit more toxic there, but it’s interesting to see the CEO stick to his guns regarding the plan here. Earlier, he made the case for the standalone company, downplayed the oilfield customers and struck an optimistic tone:

Ingevity’s annual revenue is running at more than $900 million, and adjusted EBITDA is now at an annual rate of approximately $200 million. The oilfield services business is now less than 10% of annual revenue at approximately $80 million. This business is relatively small compared to the total business. We achieved record quarterly sales for activated carbon and asphalt additive products. We have good growth engines in the asphalt additives and automotive carbon, including the new automotive carbon plant that’s starting up in China. We have a strong profitable business, a very strong management team and the scale with which to operate as a successful public company. The long-term fundamentals of the business are sound and will make for a compelling growth equity story. Post spin, Ingevity will have reasonable leverage at about 2.5x EBITDA. This will provide an immediate cash inflow of approximately $400 million to WestRock at the time of the spin, plus funding an additional $80 million in security for a capital lease retained by WestRock.

Sounds good, but the results are still worse than prior years and likely heading further in the wrong direction. Either way, management seems committed to the move and for now, the spin is slated for May. While I doubt management would want the embarrassment of having that date slip yet again, things have a funny way of changing very quickly, especially if someone loud gets involved.

Disclosure: Author holds no position in any stock mentioned


  • 💬 Marcin Zientek