May 20, 2015 - 1:50pm EST by
2015 2016
Price: 11.45 EPS 0 0
Shares Out. (in M): 63 P/E 0 0
Market Cap (in $M): 723 P/FCF 15 15
Net Debt (in $M): 425 EBIT 0 0
TEV (in $M): 990 TEV/EBIT 0 0

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  • Special Purpose Acquisition Company (SPAC)
  • Agriculture
  • Food Ingredients
  • Special Situation



Boulevard Acquisition Corporation (common stock ticker “BLVD”) is an under-the-radar event-driven / special situations investment with an asymmetric risk reward – at current $11.50, risking $1.50 to make $5 to $10 in the next 6 to 12 months – with clear catalysts to unlock that value, an under-appreciated playbook/precedent in Martin Franklin’s Platform Specialty Products (PAH), and a margin of safety at approximately $10.00 cash per share in the form of shareholder liquidation and redemption rights, ahead of a likely management road show to discuss the merits of BLVD’s recently-announced deal (July shareholder vote).

BLVD is a special purpose acquisition company (“SPAC”) sponsored by Marc Lasry’s Avenue Capital Group that has been capitalized with $10.00 cash per share since its IPO on February 19, 2014, where it raised $221m in actionable net proceeds for deployment in a business combination. On April 30, 2015, BLVD announced a definitive agreement to acquire The Dow Chemical Company’s (DOW) AgroFresh business in a $810m cash-and-stock deal. Per the Preliminary Proxy which hit May 14, this deal was the outcome of a search process during which BLVD “reviewed and considered more than 100 acquisition opportunities and engaged with several possible target businesses in detailed substantive discussions or negotiations with respect to potential transactions." On the M&A call, for which a webcast replay is available, BLVD stated: “We expect the shares to trade well and to provide management with an attractive currency for consolidation and growth” (webcast: plus PDF of presentation from M&A call: plus link to May 14 proxy: 000104746915004785/a2224768zprem14a.htm).

AgroFresh is an asset-lite (capex 1% of sales), high-touch (80+% gross margins, 30+% SG&A as a percentage of sales), technology-driven (IP portfolio, R&D team) specialty chemicals business that specializes in pre- and post-harvest management solutions. The business is expected to generate $177m in sales in 2015E (+14% 5-year CAGR), $100m in EBITDA (industry-leading 56% margin; +25% 5-year CAGR), and $48m in free cash flow. The deal is a de facto IPO for AgroFresh, which following a BLVD shareholder vote in July will become a standalone publicly traded company. DOW’s Tom Macphee – a chemist by training who has spent 35+ years in chemicals corporate development, strategic planning, and M&A – will leave DOW to become AgroFresh’s CEO, joined by many of the executives who helped build AgroFresh from the ground up.

BLVD is undervalued as a standalone business. At BLVD’s current share price of $11.50, you are creating AgroFresh at approximately 9.4x the company's estimated 2016 EBITDA (9.6x assuming Avenue earns its incentive Founder Shares upon stabilizing BLVD above $13.00 post deal) versus peers at 11x to 15x (including Monsanto, Syngenta, FMC, Novozymes, CHR Hansen, Frutarom, Naturex, Balchem, and Ecolab) and versus its closest peer, PAH, at 12.5x. You are also creating AgroFresh, due to its capital-lite services-oriented business model, at approximately a 7% free cash flow yield versus peers at 4% to 5%, a productivity not fully captured by an EBITDA multiple. If AgroFresh had conducted a traditional IPO with a formal roadshow, the stock would likely have priced within this peer range – which implies a per share value of $14.00 to $20.00 – and it would have been much more challenging to get an allocation. As legacy SPAC holders from the IPO exit, trim, or hold, there are few natural buyers amidst this increased supply save for special situations investors, until the company is able to frame the investment for longer-term fundamental chemicalsinvestors

Preliminary proxy materials were filed with the SEC on May 14. Per the company’s M&A call, the record date for the shareholder vote will be set late June, final proxy materials will be mailed to shareholders mid-July, and the shareholder vote will be held late July with the deal closing shortly thereafter. It is highly likely that Avenue and AgroFresh management will meet with shareholders this June or July ahead of the vote in a de facto IPO roadshow, which should bring more attention to the BLVD investment thesis (currently there is no research coverage). As a potentially informative precedent, Larry Levy’s Levy Acquisition Corp (TACO) announced its Del Taco deal in March and, in conjunction with Citigroup, began meeting with TACO shareholders in May with meetings scheduled for May 11 through May 27 ahead of a June 15 shareholder vote (TACO references the week of June 15 as “closing week”). BLVD is also being advised by Citigroup (per the AgroFresh deal press release) which is likely to launch coverage of the stock post deal.

But BLVD is more than AgroFresh: it is a PAH-like platform to roll up free-cash-flow-generative businesses in the specialty chemicals space and drive value above the $14.00 to $20.00 share price range currently imputed by its peers. Not only does BLVD’s current stock price undervalue AgroFresh, but the market also is not assigning BLVD any platform value. This is the most under-appreciated part of the BLVD investment thesis. Page 29 of the May 14 proxy lists 11 items the board considered before consummating the deal. The very first is: “The potential for the post-Transaction company to be a compelling platform for further investments in the Agricultural Chemicals space, drawing on favorable macro dynamics driven by global food demand growth, and/or for further investment elsewhere in the Specialty Chemicals space.”

BLVD’s closest peer, Martin Franklin’s PAH, which itself derives over 70% of its sales from its ArgoSolutions businesses, provides an under-appreciated precedent for how the BLVD event path is likely to unfold from here. Franklin, founder of consumer rollup Jarden (JAH), launched PAH as a JAH-like vehicle in the specialty chemicals space, with the mandate of accretively rolling up scalable, services-oriented, free-cash-flow-generative businesses using leverage and prioritizing M&A over R&D in an intensively ROIC-focused financial model. PAH listed in May 2013 as a SPAC capitalized with $10.00 cash per share, nearly doubled in the 6 months following the announcement of its MacDermid coatings deal that October, and currently trades at $27.00 per share following the consummation of three additional deals in 2014 (Arysta LifeScience, Agriphar, Chemtura AgroSolutions).

In his April 2014 presentation “The Outsider: Perspectives from Allergan’s Largest Shareholder,” Pershing Square’s Bill Ackman asked why PAH’s share price had nearly doubled following the MacDermid deal when PAH had paid 10x LTM EBITDA for the business (fair market value) and when the seller was a sophisticated private equity firm with no urgency to sell (link: Ackman’s answer: the market ascribed “platform value” to PAH, as with John Malone’s Liberty entities (LMCA) and those touched by 3G (ABI, KRFT/HNZ). That is, the market is willing to pay a higher multiple of cash flow for a business led by a distinguished, well-incentivized capital allocator who can accretively roll up a space, extract synergies, seamlessly integrate multiple deals, and maximize shareholder value. Franklin has followed up his PAH with Nomad Holdings (NOMHF), a SPAC that listed at $10.00 cash per share in April 2014 and which currently trades $18.00, having announced deal for European frozen food business Iglo in April 2015. NOMHF has not appreciated 80% above its initial cash capitalization because Franklin got a great deal on this frozen fish stick business. Rather, the market is already pricing in the next deal and sees the opportunity pipeline as larger food strategics divest or are pressured by activists to divest one-off frozen food assets. Not surprisingly, Pershing Square owns PAH and recently disclosed a stake in NOMHF at the 2015 Ira Sohn Conference.

Looking beyond the AgroFresh deal in isolation, the industry context for BLVD’s broader platform strategy is highly attractive. Activists such as Third Point in DOW and Trian in Du Pont (DD) are pressuring chemicals conglomerates to divest noncore assets. Meanwhile, mega-cap M&A in the agricultural chemicals space, such as Monsanto’s (MON) recent $40B offer for Syngenta (SYT) could lead to billions of dollars of forced divestitures on antitrust. For example, Reuters reported on May 14 that MON is looking for buyers of up to $8b worth of assets before making a fresh offer for SYT, possibly within the next three weeks. Interestingly, BLVD lists both MON and SYT as peers and since 2008 has partnered with SYT to apply its post-harvest management solutions to major field crops including soybean, cotton, wheat, and rice. Much like PAH, BLVD is also well positioned to target adjacencies in water treatment, cleaning, coatings, and flavors and fragrances. Against this backdrop, BLVD benefits from Avenue’s analytical and deal-sourcing resources plus CEO Macphee’s 35-year track record in chemicals M&A. This dynamic – active/forced sellers of one-off assets, plus M&A among peers – supports both BLVD’s deal pipeline and BLVD’s own public market multiple.

Avenue will own 20% of the pro forma equity on a fully diluted basis assuming the exercise of all issued warrants, and Avenue will receive incentive Founder Shares if BLVD reaches $13.00 for any 20 trading days within any 30-day trading period following deal close. BLVD is thus incentivized to perform – but, importantly, without the more aggressive, hedge-fund-like compensation scheme employed by Franklin at PAH. At PAH the founders are entitled to receive dividends in the form of common shares equaling approximately 20% of annual stock price appreciation beyond the highest year-end price previously used for payout. While this clearly aligns the founders with shareholders in terms of stock price appreciation, it also leaves less upside for shareholders. There is no such onerous fee structure at BLVD. 

Longer-term, BLVD could be acquired by PAH. At PAH’s March 2015 Investor Day, Franklin suggested his longer-term goal was to make PAH the next Ecolab (ECL), a rollup with a $35b market cap. This is an ambitious goal and BLVD could craft a portfolio that it will eventually exit for a premium. While lower probability, BLVD could also consider reducing its tax rate through an inversion transaction, as MON is reportedly considering with SYT.

Finally, looking towards deal close, BLVD shareholders enjoy a large margin of safety through the vote in late July. If BLVD does not complete a deal by February 19, 2016, it must liquidate and return approximately $10.00 cash per share to holders of the common. In this scenario, Avenue’s Founder Shares are rendered worthless. If BLVD does complete a deal, dissenting shareholders may exercise their redemption rights ahead of deal close entitling them to approximately $10.00 cash per share. Most probably, this deal is one of multiple we will see from BLVD over the coming year.

********************VALUATION AND CAPITALIZATION********************

In millions, except per share amounts

2016E EBITDA (BLVD Guidance) 104 
Peer Multiple 12.5x
Implied BLVD TEV 1,300 

Pro Forma Net Debt:
Net Debt on Deal Close 425 
NPV Target EBITDA Earnout 40* 
Cash from Warrants (198)**
Pro Forma Net Debt 267 

Equity Value 1,033 
Fully Diluted Shares 63.148*** 
Implied BLVD Share Price 16.36 
Current BLVD Share Price 11.50
Implied Free Cash Flow Yield 4.6%

*DOW is entitled to cash earn-out payment in 2018 if average EBITDA is $100 across FY16 and FY17
**Cash inflow assumes the exercise of 17.185 warrants at a strike of $11.50 per share
***Assumes Avenue receives incentive Founder Shares upon stabilizing BLVD above $13.00 per share following deal close

BLVD Share Price Flexing TEV / 2016E EBITDA Multiple:
9.0x 10.59 
10.0x 12.24 
11.0x 13.89 
12.0x 15.53 
13.0x 17.18 
14.0x 18.83 
15.0x 20.48 

TEV / 2016E EBITDA Multiples and EBITDA Margin:
Novozymes 18.4x 33% 
CHR Hansen 14.0x 34% 
Ecolab 12.9x 22% 
Syngenta 12.6x 21% 
PAH 12.5x 24% 
Victrex 12.5x 46% 
Croda 12.3x 29% 
Monsanto 11.7x 33% 
Balchem 11.2x 26% 
FMC 9.2x 22% 

Average 12.7x 29% 
Median 12.5x 27%
AgroFresh 55% 

Memo on BLVD Shares:
4.134 Sponsor Shares
21.000 BLVD Shares Sold in IPO (2/19/14)
1.050 BLVD Shares Per Over-allotment (3/13/14)
17.500 Shares Issued to DOW
0.900 Shares Issued to Avenue
44.584 Basic Shares

1.379 Sponsor Earnout Shares (@ $13.00/sh)
5.950 Sponsor Private Placement Warrants (2/19/14)
0.210 Additional Warrants Purchased by Sponsor (3/13/14)
11.025 Public BLVD Warrants
63.148 Fully Diluted Shares

********************BACKGROUND ON SPONSOR********************

BLVD is a SPAC sponsored by Avenue, a global alternative investment firm founded by Marc Lasry in 1995 with over $13B AUM and with a primary focus on credit and special situations investing( Lasry is Chairman of BLVD while BLVD’s President and CEO is Stephen Trevor, a portfolio manager at Avenue with over 20 years’ experience in private equity, including as co-head of Morgan Stanley’s Private Equity Group and as a partner in Goldman’s Principal Investment Group. Trevor has served on the boards of directors of public companies including Berry Plastics Corp (BERY), Capmark Financial Group (CPMK), and Cobalt International Energy (CIE). Thomas Larkin, Avenue’s CFO since 2011, is BLVD’s CFO. BLVD was organized in Delaware on October 24, 2013 and completed its IPO on February 19, 2014 raising $221M in actionable net proceeds.

Each unit (ticker “BLVDU”) consists of one share of the company’s BLVD common stock plus one-half of one whole warrant, with each whole warrant (ticker “BLVDW”) entitling the holder to purchase one share of BLVD common stock at a price of $11.50 per share. The warrants will become exercisable 5 days following deal close, have a 5-year life, and may be redeemed if BLVD equals or exceeds $24.00 per share. Per BLVD’s S-1 and 10K, the vehicle’s mandate is to acquire a capital-lite, free-cash-flow-generative business with platform/M&A potential, a clear competitive moat, and high returns on invested capital to be led by an experienced, well-incentivized management team. In pursuing this mandate, BLVD has the benefit of Avenue’s analytical and deal-sourcing capabilities. Trevor told Reuters on March 13, 2014 in an article entitled “Avenue Capital Hunts for Distressed Buyout Using Blank-Check IPO”: “We’re going to see a lot more deal flow than the typical sponsor of these vehicles. We’ve been approached by a number of companies that have said, ‘Boy, if I had $250M it could help solve a lot of problems’” ( 

********************AGROFRESH BUSINESS AND INDUSTRY BACKDROP********************

One-third of food produced globally and nearly half of all fresh fruit and vegetables are lost or wasted each year. Spoilage and contamination along the supply chain deprive growers and packers of significant P&L while hurting sales and repeat business at retailers whose customers value quality and freshness. Limiting food loss is particularly important in the macro context of a growing global population – for example, the U.S. Food and Agriculture Organization sees demand for fresh produce doubling in developed markets by 2050 – and increased resource scarcity. AgroFresh is a leading asset-lite, high-touch, technology-driven specialty chemicals business that specializes in proprietary pre- and post-harvest management solutions, helping growers and packers maintain the quality of their produce throughout the supply chain from orchard to end market. The business is expected to generate $177m in sales in 2015E (+14% 5-year CAGR), $100m in EBITDA (industry-leading 56% margin; +25% 5-year CAGR), and $48m in free cash flow with 98% cash conversion (EBITDA less Capex, divided by EBITDA). The U.S. comprises approximately 40% of sales with the rest of world 60%. 

Untreated apples rot after a week due to sensitivity to ethylene, a natural gas that hastens ripening. Historically growers and packers have used cold storage to delay ripening, but ethylene again attacks the produce once it leaves cold storage, leading to food loss during transport and marketing. Since 2002 the commercialization of AgroFresh’s SmartFresh Quality System technology, with the active naturally-occurring ingredient 1-Methylcyclopropene (1-MCP), growers and packers have been able to better preserve produce quality both during cold storage and for up to 90 days after produce leaves cold storage. The development and commercialization of 1-MCP have transformed the produce supply chain, most notably for apples, by enabling producers to keep apples fresh and high-quality year-round despite their seasonal harvest in the Northern Hemisphere from August to November. MCP basically works by blocking the ethylene receptors in apples to temporarily delay ripening. For less than one cent per pound of apples, growers and packers can store apples across seasons and capitalize on peak summer pricing while not compromising quality. SmartFresh currently treats over 80% of U.S. apples stored beyond 30 days with the opportunity to further penetrate Latin America (50% penetrated), Asia Pacific (33%), and Europe (20%) as well as expand into pears, avocados, bananas, and other fruit (e.g., plums, peaches, tomatoes). The average age of an apple at retail is actually nearly one year. On the M&A call Macphee described the cost of SmartFresh as a small insurance expense (“spending $16,000 to better secure as much as $1m in value”) that can deliver “up to a twenty-fold increase in value” for the produce. SmartFresh biodegrades naturally and leaves no lasting residue, and AgroFresh is seeking to extent it to organic apples.

AgroFresh’s customers are increasingly concentrated and sophisticated packers that are paid by exporters, wholesalers, and retailers based on the grade and quality of their produce pools. Growers are, in turn, paid based on the average price that a packer receives for the pool and prefer to work with larger packers who can extend them credit, since most apples are stored for nearly a year. Large wholesalers as well as retailers like Wal-Mart prefer to buy from larger, more sophisticated packers that can supply multiple apple varieties (there are over 100 varieties though the top 15 account for 90% of production, including Red Delicious and Gala) throughout the year in a timely fashion, a development that has prompted less efficient packers to sell or shutter. In Washington State, which produces over 60% of U.S. apples, the total number of packers declined from 44 in the late 1990s to 24 in 2008 and only 2 apple-focused grower cooperatives own a packing plant. The total wholesale revenue of the U.S. apple crop is more than $2.7b annually. 

Washington’s apple packers are investing heavily in technology in order to maintain quality product and meeting growing demand worldwide. Washington exports 30% of its fruit, a figure that will rise now that China has started importing all U.S. apple varieties, following concessions from the USDA. For example, Washington Fruit recently built a new 296,000 square foot packing line, cold storage, and shipping facility for $21m scheduled to come online in November, Borton Fruit is planning $40m of new facilities over the next three years, and Legacy Fruit Packers is adding $20m of extra packing capacity. The apple industry is moving from a seasonal harvest to a relentless year-round arms-race for yield that requires the latest technology and technical skill required to realize maximum pricing on produce pools and keep up with domestic and global demand. This month the Washington State Tree Fruit Association – a trade group representing packing houses, and which itself represents the recent consolidation of four other trade groups in the state – called the record 2014 apple crop the “new normal.” Overall in the U.S. there are ~7,500 apple growers producing ~200 types of apples on ~328,000 acres with NY, MI, and PA behind Washington. U.S. apples production and consumption have remained relatively stable over time as increasing yields have offset declining acreage. Two-thirds of apples are grown for fresh consumption while one-third are processed.

AgroFresh supplies packers 1-MCP in the form of a powder or tablet with an alpha-cyclodextrin (alpha-CD) encapsulation complex that dissolves in tap water held in a SmartFresh generator, releasing a gas form of 1-MCP during cold storage. AgroFresh keeps year-round contact with the customer (e.g., 32,000 monitored applications in 2014) and tailors the application to different produce varieties (e.g., different types of apples), offering not only technology but also ongoing advisory services. This model is highly scalable. AgroFresh has a lean, experienced R&D team and works with third-party contractors and service provides rather than having its own manufacturing facilities. AgroFresh is working to further cement customer relationships with its AdvanStore offering, a complete storage solution for packers scheduled for launch in 2016. AgroFresh describes AdvanStore as a “suite of proprietary storage room monitoring equipment and advisory services” including “advanced sensor equipment in customers’ facilities, real-time monitoring, analytics, and feedback.” Beyond extending post-harvest applications of 1-MCP (e.g., to bananas with RipeLock with a 2015 launch; currently $1m in sales) in the context of a more demanding packer customer base, AgroFresh is also extending its pre-harvest solutions (through Harvista which uses 1-MCP to extend the harvest window from one to three weeks; currently $15m in sales). Since 2008, AgroFresh has also been working with SYT to commercialize 1-MCP for use in field crops to protect them from drought.

1-MCP was discovered by scientists at North Carolina State University in 1994 and patented. Rhom and Haas acquired an exclusive license to 1-MCP (patent U.S. 5,518,988 for delaying ripening of fruit and flowers) and founded AgroFresh in 1999 in order to commercialize 1-MCP. Since then 1-MCP has become industry standard and has been approved by the U.S. EPA, FAO, FDA, and European Chemicals Bureau, among other regulatory bodies. In 2009 DOW acquired Rhom and Haas. AgroFresh owns the Daly patent (U.S. 6,017,849) for the encapsulation complex of 1-MCP and alpha-CD by which 1-MCP is delivered and 6 other patents for active ingredients similar to 1-MCP, amounting to a portfolio of over 30 patents covering 1-MCP and next-generation technologies. While most of these do not expire until 2022 to 2025 or later, the patent on 1-MCP expired in the US in 2014 and expires in Europe in 2015, and the patent on the encapsulation technology will expire in 2018 in the US and in 2019 In Europe. This presents the risk of a generic version of 1-MCP coupled with a similar delivery technology competing with AgroFresh. However, AgroFresh’s leading market share, high-touch value-added services suite, remaining longer-lived IP protection, low cost relative to packers’ growing crop value, continued progress on R&D, the extensive country-specific regulatory landscape that AgroFresh has navigated globally since 2002, and the niche markets in which it competes (e.g., $177m in sales) make it difficult and expensive for a new entrant to take share.

Looking only at the common BLVD shares outstanding, BLVD shareholders will own 60% of the pro forma equity and DOW will own 40%. Assuming full conversion of the warrants, DOW will own approximately 28% of BLVD, Avenue will own 20%, and BLVD public shareholders will own 52%. The transaction was structured as an asset purchase agreement and will result in an increase in the tax basis of AgroFresh assets per a 338(h)(10) election, which will lead to a tax shield. BLVD has agreed to provide DOW with 85% of any tax savings realized as a result of this stepped-up basis with BLVD retaining 15%. This tax-advantaged deal structure, and DOW’s likely desire to share in the upside at AgroFresh, more competitively positioned BLVD during the bidding process. In addition to the cash consideration paid at closing, DOW will be entitled to receive in 2018 an additional deferred cash payment from BLVD of $50m if AgroFresh averages $100m in EBITDA fromJanuary 1, 2016 through December 31, 2017

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Event-Driven Catalysts
1. Likely BLVD management road show in July with Citigroup ahead of shareholder vote on AgroFresh deal (de facto IPO roadshow)
2. Closing of AgroFresh deal in late July and the initiation of sellside coverage on the stock (e.g., Citigroup plus analysts covering PAH)
3. Consummation of further deals by BLVD and/or PAH using platform strategy
4. Ongoing activism in chemicals space (e.g., DD, DOW, others) pushing for divesting noncore assets
5. Ongoing mega-cap M&A in chemicals space (e.g., MON for SYT) leading to large-scale forced divestitures on antitrust (favorable deal pricing for BLVD)
6. Peer takeouts (e.g., MON for SYT) support BLVD multiple in public markets
7. Avenue receives incentive shares if BLVD stabilizes above $13.00 per share following deal close
8. Transitioning of shareholder base from legacy SPAC holders to longer-term fundamental chemicals investors and special situations investors

Fundamental Catalysts
1. Extension of SmartFresh to additional produce and further penetration of ex-U.S. geographies
2. 2016 rollout of AdvanStore comprehensive storage solution for packers
3. Rollout of Harvista products for pre-market management
4. Run-rating of RipeLock for bananas which launched in 2015
5. Potential new product launches such as crop protection with SYT (have been working here since 2008)

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