March 3, 2013
Quinpario Partners filed a 13D full of valuable information, with a lengthy shareholder letter and a presentation detailing Zoltek’s underperformance and its intent to overthrow the entire board through a special meeting with shareholders. Quinpario Partners is not a traditional activist fund. It was founded by former senior executives of Solutia, another specialty chemicals company that was sold to Eastman Chemical for $3.5 billion in 2012 (and at an acquisition premium of 64% from the one month prior trading price). Given their expertise in the specialty chemicals business, the Quinpario team was acutely aware of product and industry potential not being achieved by Zoltek management and laid out a very convincing case. Quinpario even unveiled that it made an acquisition offer “in the mid-teens” a few months earlier, representing a significant premium above the current price per share of $8.82. The Zoltek play was already a no-brainer, but if that wasn’t enough, Quinpario’s prescient timing of the 13D filing coincided with its only other activist target, Ferro Corporation (yet another specialty chemicals company), receiving a buyout offer on the same exact day for a 40% gain in less than 2 months of activist campaigning.
As for Zoltek…
- The underperformance was inherent in its metrics and valuation. The low margins had been improving, but were still underwhelming, with a gross margin nearly matching the EBITDA margin.
- Return on capital was paltry and revenues declined at a 5% CAGR over the past 5 years.
- Valuation was low relative to historical levels and Zoltek was trading at tangible book.
- Basically net cash breakeven but negative cash flows could degrade the balance sheet.
- Double checking Quinpario’s work were the negative stock price returns and significant underperformance of the S&P 500.
- Given that Zoltek’s market cap was $303M, I classified Zoltek in the $200-300M market cap bucket, which compared to all the other market cap buckets in the activist database, boasted the highest average returns and highest percentage of targets that are ultimately acquired (75% and 32%, respectively).
The Outcome: Given Quinpario’s expertise (and success) in the specialty chemicals business and strong case against Zoltek, I was convinced the fund would bring about the meaningful change necessary to turn around the company. I bought immediately after reading the 13D and Zoltek traded up 19% that day. Quinpario and Zoltek eventually entered a deferral agreement in exchange for the Company to explore its strategic alternatives. Shortly thereafter, Zoltek disclosed it had retained JP Morgan to commence a process, and in September 2013, Toray Industries announced its acquisition of Zoltek–booking me a 110% gain in less than 7 months!