Under WSA’s IPO Scanner: Valvoline Inc.

Valvoline raised around $660 million selling 30,000,000 shares at $22 per share

i1With Q3 FY16 almost coming to an end, the U.S. IPO market has so far witnessed 71 IPOs being priced, raising a total of $11.8 billion as of September 28th, 2016. In Q3 FY16, the U.S. market has witnessed 29 IPOs being priced, raising roughly $5.6 billion. As of September 28th, 2016, 96 IPOs have been filed, of which 35 have been filed in Q3 FY16. Of the total IPOs priced as of September 28th, 2016, Healthcare accounted for 31 deals or 44% of the total number of IPOs, raising proceeds of $2.6 billion, followed by IT with 18% or 13 deals raising $2.2 billion.

The IPO market has averaged at about 10 deals per month since April 2016, and this pace has been expected to increase after Labor Day, putting the year on track to close at 100 IPOs. i2IPO activity is expected to be the highest in September and October, followed by narrower windows of opportunity around the US presidential election and the holiday season.

Valvoline Inc.’s IPO comes during a slow year for IPOs; however, the U.S IPO market seems to have picked up pace post Labor Day. Valvoline can be counted among the year’s biggest IPOs, along with Japanese messaging app Line Inc. ($1.15 billion), real estate investment trust MGM Growth Properties ($1.05 billion), food distribution behemoth U.S. Foods ($1.02 billion), and pharmaceutical company Patheon Inc. ($625 million).

Company overview

Ashland Inc. (NYSE: ASH), the parent company of Valvoline Inc., is a leading global specialty chemical company that provides products, services, and solutions with an operational footprint in over 100 countries. Ashland operates in variety of markets and applications, including architectural coatings, adhesives, automotive, construction, energy, food and beverage, personal care, and pharmaceutical. It has two reportable segments: Specialty Ingredients and Performance Materials. With revenue of $7.6 billion in FY15, Ashland ranked No. 317 on the Fortune 500. It is Greater Cincinnati’s sixth-largest public company, with more than 10,000 total employees.

i3Valvoline is a leading global producer, distributor, and marketer of high quality lubricants and specialized automotive, commercial, and industrial solutions. It focuses on building engine and automotive maintenance business through its offerings in each of its primary market channels: Do-It-Yourself (DIY); Installers; Valvoline Instant Oil ChangeSM; and International. Valvoline operates and franchises approximately 720 Valvoline Instant Oil ChangeSM service centers in the U.S. In addition to its namesake vehicle and heavy equipment fluids business, the company has an approximately 1,050-store network of quick-lube service stations. It is the no. 2 such chain in the U.S. (in terms of store count) behind Royal Dutch Shell’s (NYSE: RDS-A) (NYSE: RDS-B) Jiffy Lube.

Financial highlights

For the year ended September 30th, 2015, Valvoline generated approximately $2.0 billion in sales, $422 million in adjusted EBITDA, and $196 million in net income. That compares to net income of $173.4 million on $2.04 billion in sales a year earlier. Adjusted EBITDA margin was at 21.5%. In addition, Valvoline generated free cash flow of $285 million and cash flows provided by operating activities of $330 million during FY15.

Pre-IPO developments

i4On September 22nd, 2015, Ashland announced its plans to separate the company’s automotive solutions and lubricant business, Valvoline, into a standalone publicly traded company through a tax-free spin-off. In a run-up to the IPO, on April 13th, 2016, Ashland announced its separation from Valvoline by selling 20% of its common stock through the IPO, followed by the distribution of the remaining 80% common stock of Valvoline to shareholders of Ashland. The split would create two publicly traded entities: Ashland Inc., which will include Ashland Specialty Ingredients and Ashland Performance Materials, and Valvoline Inc., which will be based in Lexington. Following this announcement, Valvoline filed its initial S-1 on May 31st, 2016.

Through the spin-off, Valvoline will have the opportunity to develop its multi-channel delivery and develop its high margin operations like heavy machinery lubricants. Both businesses are expected to emphasize on organic growth and look out for strategic inorganic opportunities.

Prior to the separation, Ashland also said that its current pension and post-retirement liabilities owed to U.S. employees would be transferred to Valvoline, while Ashland would retain the foreign liabilities. Ashland also stated that independent dividend polices of the post separation entities would approximately match the current payout. i5Post separation, Valvoline is expected to incur a lesser tax bill relative to Ashland Stub, owing to its larger operational presence in the international markets.

IPO details

On September 12th, 2016, Ashland announced the launch of Valvoline’s IPO, offering 30,000,000 common shares to the public, representing 14.7% stake in the company (excluding underwriter’s option). Subsequently, on September 22nd, 2016, Valvoline raised around $660 million by selling 30,000,000 common shares, representing 16.9% interest, at $22 per common share. The IPO includes a 30-day over allotment option to the underwriters to buy an additional 4,500,000 common units. The final pricing of $22.00 is above the midpoint of marketed range of $20.00 to $23.00 announced earlier.

On September 23rd, 2016, Valvoline’s shares began trading on the New York Stock Exchange under the symbol “VVV”. The stock climbed 7.3% to close at $23.60, giving the Lexington, Kentucky-based company a market value of $4.7 billion. The offering closed on September 28th, 2016. Ashland retained 170 million common share units in Valvoline following the IPO, which represents an 85% stake or 83% if the overallotment option if fully exercised. This translates to an ownership ratio of 2.74 Valvoline shares for every Ashland share outstanding. Valvoline’s remaining common stock will be distributed in a spin-off during March 2017.

As much as 5% of the shares sold in the offering were reserved for select Ashland employees and Valvoline Instant Oil Change store franchisees. BofA Merrill Lynch, Citi, Morgan Stanley, Deutsche Bank, Goldman Sachs, and J.P. Morgan acted as lead managers on the deal.

Post-IPO plans

Valvoline expects to use the proceeds from the IPO to pay existing debt, after which, Valvoline plans to borrow about $980 million and transfer the proceeds to its parent company, according to the deal prospectus. While Ashland will hold about 85% of Valvoline after the IPO, according to the filing, it plans to spin off its stake to shareholders in a tax-free transaction after a 180-day lockup period. Ashland has been seeking to refine its focus on specialty chemicals, with the Valvoline IPO marking a step in that direction.

Stock performance

i6Valvoline’s stock stood at $23.85, gaining 0.72%, at the close on Wednesday, September 28th, 2016, having vacillated between an intraday high of $24.07 and a low of $23.41 during the session. The stock’s trading volume was at 1,805,513 for the day.

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