Ashland (ASH 6.33%) is a chemical maker. But that's a bit too simple of an explanation, because the company also owns motor oil company Valvoline -- at least it does for now. What's that mean? Well, here's the down-low on Ashland and how it's changing its business.
Get out of here
Ashland is really two businesses in one. It has a large chemicals business, and it also owns motor oil and quick lube specialist Valvoline. At least it does for now, because it's planning to spin Valvoline off. There are clear similarities between the two businesses, but Valvoline really has its own brand image. And at 40% or so of revenues, it's a big chunk of what Ashland does.
The thing is, Valvoline is doing pretty well right now. But the rest of Ashland has been struggling through a weak chemicals market. Ashland shares, meanwhile, are down some 25% over the past 12 months. Clearly, Valvoline, which has grown adjusted EBITDA by an annualized 13% over the past five years, isn't attracting as much investor attention as the chemicals business.
So spinning Valvoline off, tax free to shareholders, could unlock value for stockholders. It also happens to be the single biggest thing going on at the company right now.
Not so pleased
That said, some shareholders don't like the idea of spinning Valvoline off. Elmrox Investment Group LLC, which claims to own around $100 million worth of Ashland stock, thinks Valvoline is a better bet than the chemicals business. It's asking Ashland to turn the spin-off equation on its head and to consider selling the chemicals operation. Then Elmrox wants to see Valvoline structured as a master limited partnership.
So far, Ashland is sticking to its guns. But having a dissident shareholder on board can make things a lot more complicated -- as if spinning off 40% of a company wasn't complicated enough. On top of all this, Ashland has been doing a lot of buying and selling in recent years, so the Valvoline spin-off was kind of a culminating event -- but only if it actually happens as currently planned.
So the five-minute guide over the near term is all about what's going to happen with Valvoline. But what about the other 60% of the company? Well, the rest of Ashland makes chemicals for an incredibly broad array of industries, including construction, oil and gas exploration, automotive, food and beverage, pharmaceuticals, and coatings, among others. It's got operations around the world.
As noted, it's been refocusing its business, trying to highlight higher growth and higher-margin markets while getting itself out of less desirable ones. For example, key growth areas right now are in the drug, personal care, and coatings spaces, all of which the company expects to grow more quickly than the global economy. This shift and the continued success of Valvoline is what has helped push the company's EBITDA margins from around 5% in 1995 to over 20% last year.
So in many ways, Ashland appears to be doing the right things on the chemicals side of the business. But you can't sidestep the broader dynamics of the industry. Chemicals are weak right now, which is ultimately why Elmrox is pushing for the sale of this business.
In fact, even industry giants such as Dow Chemical (DOW) and DuPont (DD) are making huge changes -- a fact Elmrox points out. Because of the difficult chemicals market, this pair is merging, with the goal of cutting costs by as much as $3 billion. Once that process is complete, the plan is to break the resulting business into as many as three different companies. The takeaway here? Whether or not Elmrox gets its way at Ashland, there are clearly big changes taking place in the chemicals space, and Ashland is going to have to adjust along with it.
To give you an idea of what's going on under the covers, in the company's fiscal first quarter of 2016, Valvoline posted record results but Ashland's chemicals businesses were hampered by factors including divestitures and weakening demand in the U.S. energy market. The company's overall sales were down nearly 13% in the quarter. Ashland really is a tale of two companies. And the while the chemicals business isn't feeling the "worst of times," it certainly isn't doing as well as Valvoline.
The highlight reel
If you're looking at Ashland today, the overriding event is the Valvoline spin-off. It's simply a huge part of the business. That, however, has to include the prodding of Elmrox, an outside investor that thinks there are other options to consider. Indeed, in recent days, dissident shareholders appear to be having an outsized impact on companies of all types. So it's too early say that the spin-off story is done here.
But Valvoline shouldn't distract you from understanding the rest of Ashland, which is a widely diversified chemicals company. That's been a rough market of late, but Ashland has been adjusting its business to benefit from the areas that appear to have the best growth prospects. Still, chemicals are out of favor right now, and that's been driving Ashland's shares. If it gets things right, it should come out the other side of this weak market a much stronger company. Unless it gets sold, that is.