ContextLogic is Abrams Capital’s permanent capital vehicle and a serial acquirer of high quality businesses, which it calls a strategy to build a ‘string of pearls’. In December last year, the company announced the huge $908mm acquisition of US Salt, its first acquisition.
On August 5, ContextLogic announced the $850mm acquisition of gChem, its second acquisition.
This update discusses:
Why gChem is a great business
Deal structure and funding sources
Valuation post-deal
Update on US Salt
Prospective returns from here
gChem
gChem is a specialty solvent business founded in 1962 and was the first company to make dimethyl sulfoxide (‘DMSO’) commercially. It has one plant, in Tuscaloosa, Alabama, and 65 employees. EagleTree Capital bought control in October 2018 and put Frank Roederer in as CEO in 2019.
As Roederer explained on the acquisition investor call:
“At its simplest, a solvent is a liquid that allows other substances to dissolve, mix, react, be carried, or be cleaned away. DMSO is unusual because it combines several properties that are rarely found together. It dissolves an unusually wide range of substances, and it mixes freely with water and most organic compounds. At the same time, it has an outstanding toxicity and biodegradability profile relative to many other solvents in its class... When an ordinary solvent cannot provide the required combination of solvency, purity, safety, and consistency, DMSO often can.”
gChem is one of only three major suppliers in a high-value niche market and has several moats.
The first moat is the complexity of the manufacturing process and vertical integration required. Making DMSO also means making two other chemicals first, in sequence, on the same site:
Hydrogen sulfide is supplied by a refinery next door on a long-term contract.
Hydrogen sulfide plus methanol makes dimethyl sulfide (DMS).
DMS is then oxidized using nitrogen tetroxide (NTO), which gChem also makes on site. The result is DMSO.
gChem effectively has three distinct on-site processes, and is the only on-purpose producer of DMS and NTO in North America.
The second moat is switching costs. DMSO is usually a single-digit percentage of a customer’s cost and is often spec’d in. For some pharmaceutical products, switching requires regulatory approval.
gChem has demonstrated clear pricing power. EBITA has cagred at 19% since 2019, primarily through pricing and mix rather than volume. The majority of DMSO revenue is generated by multi-year contracts with price escalators.
Pages 9-19 of this presentation provide additional details on the quality of the business:
The Transaction
ContextLogic is paying $850mm plus $15mm in fees for a total transaction cost of $865mm. The acquisition is being financed by:
$650mm rights offering at $9/shr, fully backstopped by Abrams Capital, BC Partners, and board member Paul Levy.
$250mm in debt at SOFR + 450bps (~8.2%).
LLC shares on a look-through basis will increase 71% post-deal from 101.7mm to 173.9mm. While this is a large increase, the backstop means that insiders are aligned and buying more shares.
These insider purchases are part of a broader pattern, with Chairman Raja Bobbili of Abrams Capital spending $5.3mm of his own cash repeatedly buying stock from March through to May at $7.91-$8.75/shr.
The most interesting aspect of the ContextLogic / US Salt deal in my view was that Abrams Capital not only rolled their stake, but were also buying out some of the other partners and backstopping the rights offering alongside BC Partners. None of the Abrams and BC members will take any compensation on an ongoing basis, meaning the two firms will be paid entirely through their investments in the company.
Bobbili’s significant open-market purchases were another great indicator of alignment. Abrams Capital have indicated they intend to fully exercise their rights in the gChem rights offering, which marks the third time in 12 months Abrams or Bobbili have made major purchases of stock.
I continue to view this alignment and Abrams’ vision to build out a platform of great businesses as the main arguments for an investment in ContextLogic.
As part of the gChem deal, CEO Frank Roederer has also signed a five year employment contract and made a “meaningful” investment into ContextLogic.