Distributor 2M delays IPO plans on M&A, Brexit

2M has delayed plans for an initial public offering (IPO) because of mergers and acquisitions (M&A) activity, Brexit and increasing activist investor activity in Europe, according to the CEO of the UK-headquartered distributor.

The group had originally planned to go for an IPO in 2017 but delayed it, first because it was pursuing a major M&A deal which has not yet come to fruition. A listing has been delayed further, thanks to the uncertainty caused by Brexit plus nervousness over the activities of activist investors in Europe.

Speaking on the sidelines of the European Petrochemical Association (EPCA) conference in Vienna, Austria, CEO Mottie Kessler said: “We delayed it first because we looked into a few significant acquisitions which would have been time-consuming but also have given us a higher valuation. So we decided to delay it until the acquisition took place. We have made acquisitions but not the big one that was due in the last 12-18 months.”

Kessler said that adding a large acquisition would increase 2M’s earnings before interest, tax, depreciation and amortisation (EBITDA), making it more attractive to investors and helping achieve a higher valuation.

Company sales reached £130m in the financial year to April 2018, up by 23% from £106m the year before.

FIRST M&A, NOW BREXIT

Brexit is further delaying the IPO process. “As we got closer to Brexit date and with a high probability of a hard Brexit, and with the uncertainty it creates, it is clear that investors are worried and this introduces uncertainty into the stock market and could impact our valuation,” Kessler said.

He is confident that 2M will be well-­prepared for any Brexit scenario. “If we do that, and go for an IPO at a later date – say a year later – we can show the investors that not only did Brexit not impact us but that we are actually stronger, that has a positive effect [on our valuation].”

ACTIVIST INVESTORS

Kessler is also worried that an IPO could open the door to activist investors in the future, and this is giving him pause about taking 2M public.

“The other thing which has been happening recently and causing me some concerns, or second thoughts, is the increasing trend for activist investors. This was previously a US phenomenon but is becoming more European.”

Kessler said it is “ridiculous” that an activist can buy 2% of a business and then tell management how to run it.

“That happened to AkzoNobel and Dow. We are smaller and people tell us they only target larger companies. But we have ambitions to be larger so for our long-term strategy this is causing me some second thoughts.”

Overall, the benefit of going public – giving 2M access to public funds – seems to outweigh the risks, he added.

Kessler dismissed the suggestion that selling to a private equity firm could be another option.

“This will never be an option because I don’t plan to exit. I want the company to stay after my time, which is another reason to IPO. Private equity are doing a great job in many areas and I have a lot for respect for them.”

But, he added, they have a clear short-term strategy to buy a business and then sell within three to five years. “There would be a clash of cultures. Chemicals is a long-term business, subject to cycles, and having pressure to make a decision for the next quarter rather than a longer-term strategy would have a negative impact on me.”

BREXIT REACH TRANSFERS

2M has transferred some of its Reach registrations to mainland Europe subsidiaries as it tries to minimise the potential impact of Brexit on its operations.

The CEO said he has taken the precaution of moving the registrations to the continent so that in the event of a hard Brexit, 2M will be able to continue trading the products into Europe.

He said: “A hard Brexit means only a European entity is allowed to keep the registrations, so we have transferred some Reach registrations to our European subsidiaries.”

If such moves become widespread across the industry this could deny the UK taxes which would previously have been paid by chemical companies as exporters.

“This means where products used to be imported by a UK legal entity, now they will be imported by a European legal entity. I met with Her Majesty’s Revenue and Customs and told them that sadly this means duties will be paid abroad. I assume other companies will do this, so there will be a negative effect on UK government income.”

Kessler said that in his capacity as chair of the Chemical Business Association (CBA), he and the group have been highly focused on lobbying the government on the importance of the free flow of goods and alignment of regulations. He pointed out that, out of over 100 members, less than 6-7% do not support this position.

“Hope is not a strategy, so we have analysed all business areas, checking with customers and suppliers to ask what will happen if the products they trade with Europe will be delayed or impacted by duties,” he said.

2M has developed mitigation plans which involve higher stock levels, alternative supply sources and operating through its European subsidiaries.