Description

The pitch on QPAC is relatively straightforward and so if the text seems brief it befits the relative simplicity of the idea. Shareholders of Quinpario Acquisition Corp – a SPAC or blank-check company – will be asked on June 30^th (record date June 16) to vote in favor of a business combination with Jason Partners Holdings Inc. (Jason Inc or Jason throughout this write-up). The transaction value is $539mm, funded primarily by the SPAC cash of $177mm and two term loans totaling $420mm. The transaction is being consummated at a value of 6.8x 2013 pro forma EBITDA, but based on public comparables and looking forward to 2015 EBITDA, we value the shares at $13.30-19.60, for a 30-92% potential return. We expect the incumbent management team, in conjunction with Jeffry Quinn and his team on the Board, to create material value – he has helped do so previously as the CEO of Solutia and as a Board member of Ferro (FOE) and as an activist investor in Zoltek.

SPAC Mechanics

The typical SPAC can be summed up simply: a management team raises capital in exchange for units (a share + a warrant), puts the cash in escrow, searches for a company to acquire within 16 months, and then allows holders to vote on whether to acquire the company (e.g. Jason Inc) or get the cash back (the original issuance amount, usually $10, plus a guaranteed amount of interest, which in this case would mean a redemption of $10.26 at last check). The arb community is usually the bulk of original holders as they get a guaranteed, albeit small return, with the optionality of mgmt. finding an acquisition that is value-additive and will likely receive a positive vote, allowing them to sell their shares plus warrants which have a cost basis of essentially zero. In the case of QPAC, the company is actually in an active tender to repurchase up to 9.2mm of their public warrants at a purchase price of $0.75 per warrant (QPACW), giving an arb a return of 10.1% over the last 10 months if they did in facr tender. The key is this transition period ahead of the vote, in getting the shares out of arb hands and into fundamental holders’ hands to ensure they get the vote. Per our conversations with the company and the underwriters, they are confident they have the vote locked up.

As it relates to QPAC, the record date for the vote is June 16 with a vote scheduled for June 30. At closing, the ticker will likely change to “JASN”.

Thus, at today’s price, your near-term downside is $10.26 if the vote is lost, and your upside is whatever you deem Jason plus the QPAC team to be worth. We believe there is material value in the combination.

Jeffry Quinn and Team – History

Quinn is the architect behind QPAC and a key reason to own the shares. After being hired as General Counsel for Solutia in 2003, the company entered Chapter 11, and he was soon elevated to the CEO position. He and his team restructured the business before and after emergence. Forbes summarized Quinpario well during the Zoltek approach: “The firm was founded in 2012 by Jeffry N. Quinn and several senior executives from Solutia Inc, after Quinn and his team sold Solutia to Eastman Chemical Co. Over the eight years leading up to the sale, they had transformed Solutia from a bankrupt local commodity chemical producer into one of the world’s leading global specialty chemicals firms.” These links provide more color around his time at Solutia but it is a safe generalization to say that if you were a shareholder of Solutia in Chapter 11, or any time in 2009/10 post the financial crisis, Quinn and team created significant shareholder value.

http://www.sbnonline.com/index.php?option=com_k2&view=item&id=22061

http://www.bizjournals.com/stlouis/print-edition/2012/02/10/quinns-30-million-payday-in-solutia.html?page=all

Post Solutia, apart from raising this SPAC, Quinn got involved in at least a couple of very profitable special situations: Ferro and Zoltek. In the Ferro (FOE) situation, the Quinpario team partnered with FrontFour Capital Group and acted as 2/3 of the activist slate of directors (Quinn and Nadim Qureshi, Chief Strategy Officer of QPAC, joined David Lorber, Managing Member of FrontFour), which was revealed in a letter in January 2013. The letter cited the deteriorating operating performance of FOE – the stock had declined from a high of over $16 in early 2011 to under $3 in late 2012 – and highlighted that in the midst of a CEO search and an exploration of strategic alternatives for the company’s solar paste business, which had collapsed alongside most things solar, the Board and management should broaden the strategic review to consider all businesses within the company. Within 2 months, SHLM offered to acquire FOE for $6.50 in cash/stock deal (25% premium to the previous close). The bid was rejected, and FrontFour/Quinpario commented in a follow-up letter: “While we do not believe the offer fully values Ferro, the manner in which the Ferro Board summarily rejected the offer without appearing to have engaged A. Schulman and attempting to negotiate a higher price speaks volumes”. Prior to the proxy vote in May, FOE and the activist group agreed to add Lorber and Quinn to the slate up for election, which they subsequently won. SHLM terminated its approach in July, but FOE went on to divest two segments (precious metals powders and more importantly, the Specialty Plastics business to SHLM for $91mm), beat earnings expectations nearly every quarter since, and increase its 2015 targets.

On the day before the letter was published, January 23, 2013, FOE closed at $4.87; the stock reached $14.05 on November 26, 2013 for a 189% return in 10 months. It currently trades at $12.44.

Similarly, Zoltek was a perennially under-performing carbon fiber producer before Quinpario Partners (not the SPAC, but Quinn’s investment partnership) filed a 13D disclosing ownership of 10.13% in the company and outlining their reasons to push for a special meeting to replace the Board. On March 4, 2013, ZOLT traded at $9.25, and the 13D / letter from Quinn offered two strategic alternatives: 1) an acquisition of ZOLT by Quinpario in the mid-teens; 2) a recap whereby Quinpario would make an equity investment in ZOLT that combined with a new credit facility would fund a sizeable special dividend. The presentation they made public that day is at this link: http://www.sec.gov/Archives/edgar/data/890923/000092189513000496/ex993to13d09241002_02212013.htm. Six months later, on September 26, Toray Industries out of Japan announced a friendly transaction to acquire ZOLT at $16.75 per share. Versus Quinpario/Quinn’s cost basis of $7.25-7.41 (all purchased in February 2013), they were able to generate a return of 128% in a matter of months.

Quinn’s main focus will now become QPAC / Jason. The company is a niche, Midwestern, industrial manufacturer split into 4 segments: Seating (24% of 2013 revenue), Finishing (26%), Acoustics (30%), and Components (20%).  

Seating: a leading commercial and industrial seat manufacturer. The company designs a broad spectrum of seating systems for multiple vehicle platforms, ex-auto, i.e. turf equipment, commercial vehicles, motorcycles, etc. The company generated 15% EBITDA margin in 2013 and could get to a 17% margin per Quinn.

Finishing: the global leader in customized industrial brushes, buffs, and buffing compounds. This business is 65% consumables and thus has high recurring revenues. They are used for surface finishing, preparation, metal removal, sealing, shielding and polishing. The company generated 10% EBITDA margin in 2013 and could get to 18% over time – this is arguably the strongest market position for the company with the most margin opportunity reflecting Jason’s market share, the high recurrence aspect of its sales and the products’ relative cost versus their necessary nature from a functional standpoint.

Acoustics: this is Jason’s key auto exposure, providing fiber-based acoustical products to 70% of the light vehicle platforms in N America. The company generated 11% EBITDA margin in 2013 and could possibly get to 15% over time, though my assumption is that a relatively low-value auto part would be challenged to get above 13-14%.

Components: mostly exposed to consumer goods, general industrial, and mass transit, this segment produces stamped, formed, expanded and perforated metal components and sub-assemblies. The company generated 17% EBITDA margin in 2013 and this is probably a consistent level it can achieve.

Projections and Valuation

QPAC has provided some 2018 targets, related to end-market and geographic mix. A few of the key highlights include reducing automotive exposure from 36% in 2013 to 25% by 2018, and reducing consumer goods from 23% to 18%, with the main growth areas being what the company terms its “Key Growth Markets” of Energy / Oil & Gas, Construction, Agriculture, Commercial Vehicles, Mass Transit, Aerospace, and Power Generation (16% today with a 35% target). Geographically, the company is today 79% exposed to N America (2013 sales) and intends to increase Asian exposure from 1% currently to 7% by 2018. To that end, the company recently opened a sales office in Singapore to focus on finishing sales. The company also intends to be active in M&A, both in new platforms ($250-500mm of potential revenues) and bolt-ons ($25-50mm, in core businesses). They have disclosed an active pipeline particularly in Seating ($50-250mm potential revenue), Finishing ($85-200mm), and Components ($35-100mm). Keep in mind, Jason has acquired 38 businesses since its formation in 1986 and integration is a key core competency at the company.

Quinn, a major holder of the shares, is targeting $1bn of sales at 15% EBITDA margins in 2-3 years (though margins could eventually reach 18-19%, in his view). In the meantime, this is what we project:

Note, we are slightly higher than QPAC’s original projections for 2015-16 as provided to Stifel for their fairness opinion (as detailed in the proxy):

Using our projections, and a range of multiples of 7.5-9.5x 2015 EBITDA, we calculate a share price range of $13.29-19.62. For comparison purposes, we have used a subset of similarly-profitable industrials: CSL, CR, RBC, TRS, CMCO, CIR, and KAI. This group averages 8.2x 2015 EBITDA with a range of 6.3x-9.9x.

(We are assuming the treasury method for the post-tender warrants which can be redeemed if the share price is sustained at $18, versus a strike price of $12 and an expiry in 5 years. In addition, we are using the current balance sheet and not projecting FCF usage through our forecast period. This should offset the further dilution which may come from the restricted shares granted to founders which vest upon the achievement of certain price hurdles.)

Risks obviously include general industrial demand, auto demand, and industrial equity valuations.

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