OCI Unlocked
A reappraisal of OCI following announced break-up transactions.
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For the final issue of this newsletter for 2023 I am returning to one of my high conviction names and a top 3 position in the Value Sits Model Portfolio as at the end of Q3.
OCI Global (OCI) has been the subject of both major news-flow and wild stock price fluctuations over the past week following the announcement of two major transactions in the space of a 4 day period from last Friday to this past Monday.
It was reported last Thursday that the Abu Dhabi National Oil Company (ADNOC) was looking at acquiring OCI in a ~$5bn deal. This was seemingly the outcome of a strategic review initiated last March following engagement with activist investor Jeffrey Ubben. OCI’s stock price jumped over 17% on the news in expectation of a bid announcement. It was also reported that OCI management had been considering other options including a divestment of various segments of the business in tandem with an ADNOC bid, further supporting the prospect of some kind of value-unlocking event.
Then a day later, last Friday, OCI announced it was selling its entire equity interest (a controlling 50% + 1 share stake) in Fertiglobe Plc (FERTIGLB), its Abu Dhabi-based fertiliser venture, to ADNOC for $3.62bn. Recall that ADNOC is OCI’s main partner in FERTIGLB, owning ~36%, with FERTIGLB originally formed in 2019 from the merger of OCI’s Middle East assets with ADNOC’s fertiliser business.
While the $3.62bn value equated to ~70% of OCI’s market cap and ~40% of its EV, OCI’s stock price fell ~13.5%, reflecting the market’s disappointment with the negligible 8% premium being paid by ADNOC relative to FERTIGLB’s undisturbed share price. In my previous analysis of OCI, I had explained how FERTIGLB was a unique “hidden jewel” that provided OCI with a substantial low-cost production advantage over peers. In this context, investors might reasonably have expected OCI to have extracted a significant control premium from ADNOC, given the obvious strategic value of the asset for ADNOC.
As such, the market’s initial read appeared to be that OCI had agreed a “sweetheart” deal with ADNOC to the detriment of shareholders, with a controlling stake in FERTIGLB being given away below fundamental value (however, as I’ll outline below, I think the reality of the situation is much more nuanced than this).
Subsequently on Monday, OCI further announced that it was also selling 100%-owned subsidiary Iowa Fertilizer Company (IFCO), its US nitrogen fertiliser business, to Koch Ag & Energy Solutions (part of the Koch Industries conglomerate), for $3.6bn. This sale value implied a headline valuation of ~8x LTM EBITDA for IFCO, and this news was much more favourably received by the market, with OCI’s share price rallying ~30% since the disappointing announcement of the FERTIGLB sale:
Note: in the chart above, the red circle highlights OCI’s closing price following FERTIGLB sale announcement, while the green circle highlights share price rally following IFCO sale announcement.
All told, OCI is getting $7.2bn in value from these two disposals, which equates to net proceeds of $6.2bn after netting out ~$1bn in debt, closing adjustments and other costs with respect to the IFCO sale, as management outlined on the investor call presentation covering the two transactions (see discussion on IFCO sale below).
This $6.2bn in net proceeds receivable equates to ~103% of OCI’s current market cap, or ~€27/share, with further value accretion to OCI in due course from FERTIGLB dividends and an earn-out mechanism, and IFCO cash-flow up until closing of its sale to Koch Industries.
So in summary, these two disposals combined are a transformational event for OCI, effectively constituting the break-up of the company. Indeed a sale of the business by founder/chairman Nassef Sawiris was a value catalyst I identified in my original write-up, and I regard the current break-up situation as confirmation of that catalyst playing out.
I expect these disposals will unlock substantial valuation upside for OCI shareholders over the next 12-18 months, with management alluding to a return of “a substantial amount of capital to shareholders… in a very tax-efficient manner.” I also see a market re-rate or other value event in due course for the “stub” equity of the residual OCI business (comprising its European fertiliser, European methanol and US methanol businesses).
Furthermore, CEO Ahmed El-Hoshy’s comments on the investor call are noteworthy, as he suggests further disposals are possible in the medium-term:
“… near term, this is the conclusion of our strategic review, but I do want to, obviously, remind you …our approach is to continue to focus on value creation for stakeholders and shareholders. So to the extent that there is an opportunity to find a better home for an asset where we could achieve a good valuation, and that's something that I wouldn't rule out over the course of the next several years.”
With OCI set to receive ~100% of its current market cap back in hard cash by mid-2024, the key question is what is the fundamental value of OCI’s stub equity now, and what further upside is there from the current share price (~€25.92 as at the time of writing).
To answer this question, I’ll firstly review the terms and implications for value of the two transactions, before providing my updated valuation analysis for OCI, which indicates significant further upside to the current share price.