Nice post and interesting idea. The transaction is a bit odd in that they seem to want to part with the crown jewel on the cusp of a supposed inflection. Why is that a good idea?

I had the same questions about tax leakage. Does the company have sufficient NOLs to offset the gain from sale? If not, then that could push toward a spin-off if such a deal were possible. It would likely be structured as a Reverse Morris Trust; but I'm not sure if there is a strategic buyer that could make a RMT deal work.

Do they have NOLs (DTAs) on the balance sheet? I follow your analysis below and seems fair. But if the company has a big NOL pool from tax operating losses, it may be a no brainer to sell in a cash deal. (I wouldn't be surprised if the frac-sand business generated material tax NOLs, given the trajectory of the business in the past few years.)

- if there is c $100m of “central cost” then that is so absurdly high it must also include material real costs that should be in each business, as well as the truly central listed company type costs. Some of that should be deducted from ISP EBITDA, no?

Please please please include capex and/or depreciation in your theses, I know you are ex Private Equity but one can’t come to a sensible view on absolute or relative valuation without this.

On the tax on disposal point, as they don't report segment assets or capex separately, it's difficult to get a handle on a base cost for the ISP segment, so simplistically I've assumed a tax neutral/offset position here. Some further thoughts though:

1. ISP includes EP minerals which was acquired for $750m in 2018, so that's one element of base cost.

2. Since 2018, I guesstimate that cumulative ISP maintenance capex has been ~$160m based on revenue split and depreciation charges over that period

3. Prior to owning EP, I estimate the ISP segment had assets of ~$800m or so

So combining the above, total historic base cost investment in ISP segment could be in region of ~$1.7bn before any growth capex made historically.

I haven't done detailed calcs, but assuming a base cost of $1.7bn for tax disposal purposes, plus any further capex, historic losses, NOLs etc,. a tax neutral (or negligible liability) on disposal seems possible here.

On central costs, a strategic buyer like Standard Industries would presumably plug ISP into its platform/operations and realise synergies so I've assumed a valuation ex-central cost allocation. Of course, one could assume ~50% of historic central costs (or ~$48m) and deduct this from the $167m in ISP segment EBITDA and work of an assumed PF EBITDA of $120m, which would imply a multiple of 17.5x pre-synergies to a buyer if I hold the $2.1bn disposal value; or applying a 12.5x - 14.5x multiple (in line with M&A comps range) implies a $1.5bn - $1.7bn disposal value for ISP on this basis, so maybe there's leakage of ~$500m to my assumed disposal value? The other point to consider here is that if they are selling ISP this will include the sale of mines and other production facilities which would have heavy "real" or fixed costs in terms of power, maintenance etc. which would be saved going forward, and therefore reduce opex meaningfully.

On including capex and D&A, this was intended as a quick indicative analysis on available metrics - SLCA doesn't disclose a split of these for ISP, and industry buyers and transactions tend not to reference these, so I've just focused on the metrics actually used for setting market values of assets in practice in this high level analysis. Of course, in a more detailed analysis, I'd look at these in further detail.

You raise good/fair points in all the above though.

This is a very well articulated thesis. Kudos

Thanks, glad you found it interesting.

Nice post and interesting idea. The transaction is a bit odd in that they seem to want to part with the crown jewel on the cusp of a supposed inflection. Why is that a good idea?

anything changed after the recent Q3 numbers?

I had the same questions about tax leakage. Does the company have sufficient NOLs to offset the gain from sale? If not, then that could push toward a spin-off if such a deal were possible. It would likely be structured as a Reverse Morris Trust; but I'm not sure if there is a strategic buyer that could make a RMT deal work.

I've attempted to answer the tax point below in response to Ex-Locust's comments.

Do they have NOLs (DTAs) on the balance sheet? I follow your analysis below and seems fair. But if the company has a big NOL pool from tax operating losses, it may be a no brainer to sell in a cash deal. (I wouldn't be surprised if the frac-sand business generated material tax NOLs, given the trajectory of the business in the past few years.)

Excellent thesis. Thank you.

What about:

- tax on disposal profits?

- if there is c $100m of “central cost” then that is so absurdly high it must also include material real costs that should be in each business, as well as the truly central listed company type costs. Some of that should be deducted from ISP EBITDA, no?

Please please please include capex and/or depreciation in your theses, I know you are ex Private Equity but one can’t come to a sensible view on absolute or relative valuation without this.

Thanks for reading and the feedback.

On the tax on disposal point, as they don't report segment assets or capex separately, it's difficult to get a handle on a base cost for the ISP segment, so simplistically I've assumed a tax neutral/offset position here. Some further thoughts though:

1. ISP includes EP minerals which was acquired for $750m in 2018, so that's one element of base cost.

2. Since 2018, I guesstimate that cumulative ISP maintenance capex has been ~$160m based on revenue split and depreciation charges over that period

3. Prior to owning EP, I estimate the ISP segment had assets of ~$800m or so

So combining the above, total historic base cost investment in ISP segment could be in region of ~$1.7bn before any growth capex made historically.

I haven't done detailed calcs, but assuming a base cost of $1.7bn for tax disposal purposes, plus any further capex, historic losses, NOLs etc,. a tax neutral (or negligible liability) on disposal seems possible here.

On central costs, a strategic buyer like Standard Industries would presumably plug ISP into its platform/operations and realise synergies so I've assumed a valuation ex-central cost allocation. Of course, one could assume ~50% of historic central costs (or ~$48m) and deduct this from the $167m in ISP segment EBITDA and work of an assumed PF EBITDA of $120m, which would imply a multiple of 17.5x pre-synergies to a buyer if I hold the $2.1bn disposal value; or applying a 12.5x - 14.5x multiple (in line with M&A comps range) implies a $1.5bn - $1.7bn disposal value for ISP on this basis, so maybe there's leakage of ~$500m to my assumed disposal value? The other point to consider here is that if they are selling ISP this will include the sale of mines and other production facilities which would have heavy "real" or fixed costs in terms of power, maintenance etc. which would be saved going forward, and therefore reduce opex meaningfully.

On including capex and D&A, this was intended as a quick indicative analysis on available metrics - SLCA doesn't disclose a split of these for ISP, and industry buyers and transactions tend not to reference these, so I've just focused on the metrics actually used for setting market values of assets in practice in this high level analysis. Of course, in a more detailed analysis, I'd look at these in further detail.

You raise good/fair points in all the above though.