White Tale: «We are here to stay – to make and to build»

David Millstone and David Winter, co-CIO of 40 North and partners in White Tale, explain their opposition against the pro-posed merger of Clariant and Huntsman.

Christian Braun and Mark Dittli

«We are confident that the proposed merger of Clariant (CLN 24.04 1.18%) and Huntsman is in significant jeopardy », say David Millstone and David Winter, co-CIO of 40 North and partners of the opposing Clariant shareholder White Tale. In the interview with «Finanz und Wirtschaft», the two men talking with one voice, as they describe themselves, make their first public statement about their intentions with the Swiss specialty chemicals company. Their core request is that all alternatives should be examined before such an important decision is being presented to shareholders. They also counter fears that they are only looking for quick money: «We are long-term shareholders and want to help Clariant move forward.»

Mr. Millstone and Mr. Winter, White Tale last reported a holding of 15% of Clariant’s shares. Will the stake be increased further?
We already own more than 15% and we’re not done buying.

How much do you own now?
We’re not saying that because it’s not publicly disclosed. But it’s significantly more than 15%. The next filing level is 20%.

So you are still buying and you will continue to buy?
Correct ­– and we’ve been transparent to the company about this as well.

So it is an option for you to vote down the planned merger with Huntsman single-handedly through a correspondingly larger stake?
We fail to see the logic in the transaction as it is currently structured. We two are long-term oriented investors. We’re shareholders of Clariant and we are here to stay, to make and build. So we are very focused on what’s next. 40 North became a shareholder about a year before the merger was announced. We did this because we think Clariant is a gem and because we see portfolio adjustments they can do that would make it an even better business. And obviously there’ve been rumors in the market about interest in the business. We’re not here to just push for any one solution in particular, that is important to understand. We want Clariant to become a better and stronger company, and we don’t see that happening with Huntsman.

On the path towards the extraordinary general meeting of Clariant: Is there anything the board of the company can do to change your mind?
There is nothing we can conceive of right now other than what we have said in our open letter to the Board. We want them to hire an independent investment bank to run through all strategic alternatives.

That may be difficult to do.
Yes, we acknowledge that given the merger contract they have with Huntsman. But we think that without knowing what these alternatives could be, it is impossible for any shareholder to vote yes on the proposed merger. It just doesn’t make any industrial sense to us, though we did spend time trying to make sense of it. There is not much industrial logic beyond scale and cost cutting, much of which Clariant can do on their own, by the way. Then there’s the valuation mismatch. We think Huntsman is overvalued, given the cyclicality of its business and where the cycle is now. And the deal significantly undervalues Clariant.

Could an adjustment of the exchange ratio of the merger in favor of Clariant shareholders be a solution?
That would help the valuation part of the problem, but it doesn’t help anything else. The industrial logic is still not there.

But why is the proposed merger with Huntsman such a bad thing?
Basically, there are three reasons.  The valuation is one. Secondly, we struggle with the industrial logic of the deal. Thirdly, and this is the worst part, we struggle with the process. We are public shareholders, so we don’t know what we don’t know. We were not part of the decision process. But we truly feel that this merger was rushed into. While Huntsman has been exploring strategic alternatives essentially on an ongoing basis for ten years, Clariant in our view has not considered the full range of options that would be worthwhile to consider.

The board and management of Clariant say they did.
Yes, they do. But they kept saying the don’t want to sell the company and want to remain in control. That limits the options materially and I think that many players in the industry, if invited, would attend the party. They just haven’t been invited. My guess is, the things explored in the board were subject to certain rules, and those rules were that certain transactions were off the table and, therefore, were not to be considered. We have a strong suspicion that there is a multiple of other opportunities that will be far superior. Without knowing what these are, it’s impossible for any shareholder to answer the question whether they agree with the proposed merger.

Are you’re saying the board of Clariant has not done its job?
From a process perspective, yes. This is a fundamental transaction, which requires that all the options are explored and not just some of them. And besides that, we genuinely believe that a lot of the cost saving that Clariant and Huntsman want to achieve can be achieved by Clariant on a standalone basis.

Clariant disagrees on that, too.
Yes, but if they did, they could keep the value of that for themselves. Besides, the savings can certainly be achieved. If you go through it in depth, business unit by business unit, and look at their margin profile versus the profile of close competitors in the public market, we are in several areas talking about an eight hundred or a thousand basis point differential.

Comparing apples to apples, there may be doubts about the differentials you mention.
I understand. Not everything is the same, and again, they may know something we don’t know. But if you look at companies in similar businesses, and analyze whether there are fundamental reasons that Clariant’s business has such a large margin differential to their business, it’s hard to find any. And this again brings us to the point of strategic alternatives. If some of their competitors in some of their businesses believe they can run those businesses with higher margins, there could be a very accretive kind of transaction, a merger or a sale of some sort. If you look at the landscape of chemicals, there are logical partners out there. Huntsman is not one of them.

I struggle a bit with your description of Huntsman as being this low margin commodity cyclical business. They are moving downstream towards the kind of business that Clariant is doing. Aren’t you underestimating their ability to improve?
Without commenting too much about Huntsman, because this really is about Clariant, but 45% of their business is polyurethanes business and that is clearly a very cyclical business near the top of its cycle.

But it’s not all just commodities in there, parts of it are specialties which still have some way to go but which are on the right track.
I know, but look at the margins of the polyurethanes business. They have come up from 9% in 2010 to about 17% this year. The market currently is extremely tight, but there is a lot of new capacity coming on. Until that new capacity comes on and you again have a situation of overcapacity, the debate will be whether margins are high because there is a specialty business or whether they are high because capacity is tight. But we’ve seen that story play out so many times before: When capacity utilization comes down, commodity businesses can turn very quickly.

So you think this is not the kind of bet that Clariant shareholders should take?
Exactly. I don’t want to speak ill of Huntsman here, it’s just a different business. Clariant shareholders have better opportunities than exchanging approximately half of their shares for Huntsman business. By doing that, they would be owning a very different set of business, one that is much more into commodities. There are better and far less risky ways to create value on the strategy Clariant is on now. What we are asking for is not that complicated. We just want them to explore all the options.

What if it turns out Clariant is right and you are wrong and the merger really is the best thing?
Then, so be it. We are not digging our heads in sand. If after a thorough process that is the result, then we are open to this. However, we believe strongly that this is not the right transaction for Clariant.

Besides cost savings on a standalone basis you also propose that Clariant should sell its Plastics & Coatings division – before entering any other transaction.
Plastics & Coatings is a good business. It just doesn’t fit Clariant’s strategy. Clariant itself considers it as a strategic currency for possible acquisitions. But if they want to sell it after the merger, it’s the same thing again: The logic is hard to understand. We believe they can sell the business at an accretive multiple. Why not doing it on a standalone basis? Why giving away half of that upside to the Huntsman shareholders? We struggle to understand that.

Clariant says that selling P&C now would be value-destructive, because the company would lose an important source of free cashflow.
If they sell P&C at a good multiple, they are free of debt and have a significant cash position. Clariant wouldn’t lack cash, there would still be enough cashflow to cover all its operations and its dividend, and they could be an acquirer in the market with three remaining businesses, each of which is just an outstanding specialty business.

So why doesn’t Clariant want to sell P&C now?
Our suspicions are twofold. One is the stranded cost issue, the overhead cost that would for some time remain and therefore depress margins. This is only an optical issue. Companies are going through this all the time and people do understand this. So we don’t find that to be a compelling reason. The other suspicion is that they didn’t want to get smaller before getting bigger, because they would then be an even easier take-over target. So selling P&C wasn’t an option, either.

With White Tale, Clariant now has two large shareholders. Would this allow the company to first become smaller and then big again?
Absolutely. We are here to stay.

Looking towards the extraordinary shareholder’s meeting, how big do you assess  your chances to win?
One can’t know until the meeting. But without putting numbers on it, we are rather confident that the proposed transaction is in significant jeopardy right now. We’re focussed on being there for the long term and what’s in the best interest of Clariant after the merger is voted down. That’s why we are very focused on building relationships with other shareholders, who we are going to be partners with and who will be with us for many years to come.

Assuming the planned merger will be voted down. Should the chairman and the CEO resign then?
We can’t say that. We’re having very cordial and constructive conversations with the board and the management. We clearly disagree about the transaction in question. That’s okay. But the Clariant story didn’t start with this transaction and it will not end with it.

But you think the proposed merger with Huntsman is a mistake.
Yes, but we also think that the board and the management have done an excellent job at repositioning Clariant to become a great pure-play specialty chemicals company. However, if the CEO and the chairman should resign, I don’t doubt there would be people who would be excited to take that role. But that’s not what we are arguing for.

But are you prepared for the scenario of important persons stepping down. Do you have names ready that could fill the role?
It would be inappropriate to talk about this now. But we are confident in either scenario that Clariant is a fabulous company. We would love to work constructively with the existing management and the existing board, but at some point we have to all come to see things similarly. In any case, we are going to be supportive – if the management resigns, if they are having a bad quarter because something happens and so on. We are willing to serve on the board, and we are willing to get our hands dirty and help out. We don’t agree with the merger, but we are really interested in the long-term success and value creation for Clariant and its shareholders.

For the scenario that the merger will be voted down, you mention two ways to extract more value: selling P&C and cutting cost. But you also talk about alternative options. Market participants assume that  you want to sell Clariant outright.
I think we have been clear: We are not prejudging what the right option is. If you go into a merger agreement you are required to do a full review of all strategic alternatives. That’s our one concrete proposal. Is there a price that someone could pay for the entire company that would be so compelling that it would be the right thing to do for shareholders? We don’t know. But if there is, we would deal with it in a transparent way to shareholders and it would be for the board, the management team and the shareholders to decide.

According to you, Clariant is still significantly undervalued. What is the fair value per share, then?
We obviously bought the stock thinking that it was undervalued. We did our calculations and do have our ideas, but we don’t want to put a specific number on this. Clariant can be looked at in different ways: As it is now, as it would be when the cost saving potential we see will be fully exploited, as it would look like without P&C and in different combinations thereof. Therefore it is a range, but in any case, there is room for a meaningfully higher share price.

You describe yourself as long-term oriented investors and businessmen. What many people are skeptical about or even afraid of is the other part of White Tale: Corvex, which has the reputation of being an aggressive, activist hedge fund. So why should we believe that you are in for the long term?
We are what we say we are and have a corresponding track record of being long-term oriented. I don’t want to talk about Corvex here, because Keith Meister or any other representative is not in this room.

But why did you get involved with Corvex?
We have known Keith Meister personally for a long time and, to be frank about it, what we do right now with Clariant is not what we do for a living. It’s not who we are. Keith is the one with the experience in these kind of situations and he’s been a great partner in every step of the way.

If this is not what you do for a living, why are you doing it now and why with Clariant?
We feel that strongly, both about the fabulous prospects for Clariant and how inappropriate that merger agreement was in terms of process and likely outcome. This is a company we are excited to be involved with and we don’t want it to be distracted from its good way. The chemical industry is an industry we know something about and we love. We were attracted to this investment, among other reasons, because Clariant is a great business and because we saw an opportunity. We are convinced that there are better options for it than a merger with Huntsman.

Options like…?
We are open. We have mentioned some. Selling P&C for example would put Clariant into a position of a possible consolidator of the specialty world. That is a very attractive path. But we’re not to speculate. If they run that strategic review process, it would become very clear as to what the options are.