Description

Overview:

Gentek (GETI) is an interesting special situation. GETI filed for bankruptcy in October of 2002. Like many companies during this time GETI had a fledging telecom division that was performing poorly and using large amounts of cash. Because of poor operating results and excessive leverage GETI was forced to file for bankruptcy in October of 2002. GETI officially exited bankruptcy in November of 2003 with a much stronger balance sheet.

On May of 2004 GETI sold its KRONE communications business to ADC telecommunications for $294MM in cash and the assumption of $56 MM in pension and employee related costs. The proceeds were used to repay a majority of the GETI’s debt.

The sale of the communications division left the company with two main divisions: Manufacturing and Performance products. Manufacturing is about 45% of the new PF revenue with Performance representing the remaining 55%.

The Manufacturing segment provides a broad range of engineered components and services to three markets: Automotive, Appliance and Electronic and Industrial.

Automotive provides precision-engineered components for valve train systems, electronic wire and cable assemblies, computer aided mechanical vehicle and fluid transport and handling equipment.

Appliance and Electronics produces custom designed power cord systems and wire and cable assemblies for a broad range of appliances and electronic products including: household appliances, electronic office equipment and medical equipment, ATM’s and gaming machines.

The Industrial area manufactures custom designed wire harness and power cord systems for power tools, motors, pumps and other industrial products.

The Performance segment provides a broad range of value-added products and services to four principal markets: Environmental services, Pharmaceutical and Personal care, Technology and Chemical Processing.

Environmental services: a network of 35 water treatment chemical plants located throughout the U.S. and Canada. GETI is the largest North American producer of Aluminum sulfate which is used as a coagulant in potable water and waste treatment applications and a leading supplier of ferric sulfate and other specialty flocculent used for settling or separating solids from liquids.

Pharmaceutical and Personal care area is a leading supplier of the active chemical ingredients used in the manufacture of antiperspirants and also supplies active ingredients used in prescription pharmaceuticals, nutritional supplements, nutraceuticals, veterinary health products and other personal care products.

Technology provides ultrahigh purity electronic chemicals for the semiconductor and disk drive industries.

Chemical processing manufactures a broad range of products that serve as chemical intermediates in the production of newspapers tires, paints, dyes and carpets.

Valuation:

Since GETI recently sold its communications division and exited bankruptcy it is difficult to just look at the annual numbers in the 10K to see what the business can do. Fortunately, GETI does provide fairly detailed segment data, which gives us a better sense of what GETI can do on an on going basis. Before laying out the basic numbers here is the current valuation:

Price: $52.6
Shares Outstanding: 10.1
MV: $530 MM

Cash: $0 (assumes used all to pay recently ann. $7 div.)
Debt: $5 (est.)
Pension Liability: $138

Net Debt: $143 MM

EV: $675 MM

Less Special Dividend: $71

PF EV: $604 MM


*Note: I have treated the current pension liability as a debt like addition to EV for conservatism.

So where does this get us? I like to focus on the free cash flow generation ability of a company. I have GETI doing $71 MM in LTM EBITDA less CapEx. At this level GETI is trading at 8.5x EBITDA less CapEx. On a per share basis this would translate into roughly $7 per share in FCF or 6.5x P/FCF after taking into effect the special dividend ($52.6 - $7 = $45.6 / $7 = 6.5x). I think this is extremely attractive for a diversified specialty products and service company.

The 10K list several comparable companies for each segment of the company. It is difficult to get a sense of what a correct comparable multiple would since the business is so diverse. Many of the comparables are private or foreign. Many are also very large mega cap names that trade at premium multiples. From a rough cut it appears most of these trade at multiples north of GETI’s LTM EBITDA – CapEx valuation of 8.5x, with some trading at substantial premiums to it. I will list a few below:

Automotive markets: Eaton, INA, Ingersoll-Rand, Molex, Timken, Yazaki.
Appliance, Electronic and Industrial markets:
Belden, General Cable, International Wire, Nexans
and Viasystems.

Pharmaceuticals and Personal Care markets: Giulini, Summit and Westwood.

Environmental markets: DuPont, Marsulex, Peak, PVS and Rhodia.

Chemical Processing markets: BASF, Calabrian, Rhodia, Solvay S.A. and
U.S. Salt

Water Treatment markets: Geo Specialty Chemicals and U.S. Aluminates

Technology markets: Air Products and Tyco / Mallinckrodt - Baker



Segment Information:

LTM Q3'04 9 Mo.'04 2003A 9 Mo.'03
Manufacturing:

Revenue $483.1 $144.2 $374.6 $425.9 $317.5
EBIT $33.3 $4.7 $20.4 $36.0 $23.1
% Margin 6.9% 3.2% 5.4% 8.5% 7.3%
D&A $23.9 $7.1 $19.6 $17.7 $13.4
EBITDA $57.2 $11.8 $40.0 $53.7 $36.5
% Margin 11.8% 8.2% 10.7% 12.6% 11.5%
Capex $9.4 $3.5 $6.6 $8.8 $6.0
EBITDA - CapEx $47.8 $8.3 $33.4 $44.9 $30.5


LTM Q3‘04 9 Mo.‘04 2003A 9 Mo.'03
Performance Products:

Revenue $317.9 $84.0 $241.1 $335.9 $259.1
EBIT $25.1 $6.4 $17.5 $26.5 $19.0
% Margin 7.9% 7.6% 7.3% 7.9% 7.3%
D&A $16.7 $6.4 $14.9 $11.3 $9.5
EBITDA $41.8 $12.7 $32.4 $37.8 $28.5
% Margin 13.1% 15.2% 13.4% 11.3% 11.0%
Capex $18.6 $2.7 $10.0 $24.0 $15.4
EBITDA - CapEx $23.1 $10.0 $22.4 $13.8 $13.1


Total GETI EBITDA - CapEx: $71.0 $18.2 $55.8 $58.7 $43.6
Total GETI EBITDA - CapEx Per Share: $7.0 $1.8 $5.5 $5.8 $4.3


Conclusion:

There are two large shareholders that have board seats: Angelo Gordon and Questar. Both received shares through their ownership of the debt in bankruptcy. They appear to be the driving force behind the future shareholder value creation. On December 7th GETI announced a special $7 dividend for shareholders. GETI commented that this was the best way to use the excess cash they have on their balance sheet. As a result GETI said the company would have “minimal” borrowing at the end of the year. In addition, the company has hired Goldman Sachs to look at “strategic alternatives”. Considering GETI just got out of bankruptcy and has already done a special dividend it is logical to assume that the large shareholders are pushing to sell the company. Knowing that value oriented holders are in position of authority makes me very comfortable with the investment. At around 8x a reasonable estimate for EBITDA less capex for a diversified specialty industrial company looking to be sold sounds very attractive to me. I think it is likely the company will either get sold at a substantial premium or will sell off pieces. Even if it maintains its current form I see no reason why eventually could not trade at 12x FCF per share or $84 per share, implying a 66% upside to current levels. This would equate to roughly 13x LTM EBITDA less CapEx.

Catalyst

Sale of company, sale of divisions and special dividend.