Premium play: WE Soda pitches sustainable qualities in testing IPO market

Data InsightECM Pulse 5 June

Premium play: WE Soda pitches sustainable qualities in testing IPO market

  • Premium to synthetic peers like Solvay anchored on cost curve, natural soda ash’s environmental benefits
  • Syndicate receives over 500 meeting requests

WE Soda is hoping that its enviable cash margins and sustainability credentials can merit pricing at a significant premium to soda ash peers despite the gruelling European IPO market.

The Turkish soda ash company, which revealed its IPO plans on May 31, is reportedly seeking an equity valuation of over USD 7bn.

Sources speaking to the Pulse agree with the USD 7bn valuation ballpark figure. But benchmarking WE Soda is not a straightforward exercise, they warned.

While its largest competitor is Belgium’s Solvay SA [EBR:SOLB], the company is a synthetic not natural producer of soda ash, with a different cost and sustainability profile. US-listed Genesis Energy [NYSE:GEL] owns one of the world’s other largest producers of natural soda ash, but the unit is a small part of the whole company.

Investors have also been guided towards chemical companies like Tata Chemicals [NSE:TATACHEM] and some commodity names, sources said.

Solvay [EBR:SOLB], Tata Chemicals [NSE:TATACHEM] and Genesis Energy [NYSE:GEL] trade at 2022 EV/EBITDA multiples of 4x, 7.5x and 8x respectively, according to data from Fidessa compiled by Factset.

To its advantage, WE Soda boasts a 2022 EBITDA margin of 47%, almost double of its peers. Solvay reported an EBITDA margin of 24% and Tata Chemicals 22% in 2022.

Solvay is a poor starting point for valuation work, a source said, but “an easy trap to fall into”. Given their wildly different balance sheets and cost structures, the syndicate is broadening the conversation to include a wider energy and industrials peer group, with the likes of natural gas company Linde [NYSE:LIN], that can take the valuation conversation to double-digit multiple territory.

While WE Soda does not expect to be directly benchmarked to Linde’s 17x 2022 EV/EBITDA multiple – a hefty 30% premium to its own natural gas peers – a discount to that multiple might make more sense than justifying a mega premium to a less green competitor like Solvay, said one of the sources.

Green number crunching

Sources close to the deal say WE Soda will be pitching forward-looking multiples in its conversations with investors. But looking at the historical numbers offers a plausible initial scenario analysis. WE Soda reported adjusted EBITDA of USD 838m at year-end 2022 on revenues of USD 1.8bn. It forecasts post-money debt of around USD 600m, said one of the sources.

At the top of the soda ash peer group, Genesis' 8x 2022 EV/EBITDA, WE Soda would be valued at an enterprise value of USD 6.7bn, with equity valued at USD 6.1bn, before applying any IPO discount.

If WE Soda was rewarded with an 80% premium to Genesis' valuation multiple to reflect its 80% higher EBITDA margin, it would trade at 14.4x 2022 EV/EBITDA, implying an enterprise value of USD 11.7bn and a market cap of around USD 11bn. Applying a standard 30% IPO discount that investors have been clamouring for would make it worth around USD 7.6bn at the listing.

Tata Chemicals trades at 7.5x its 2022 EBITDA and WE Soda has around double its EBITDA margin. Applying the same logic would take its potential valuation multiple to 15x 2022 EV/EBITDA and a respective EV of USD 12.57bn, a market cap of USD 11.97bn and an IPO valuation of USD 8.4bn with a 30% discount.

WE Soda benefits from a far more favourable cost curve to synthetic soda ash producers, which warrants the higher multiples, according to the sources. Its solution-extraction production method is less energy intensive and has lower raw material input costs, according to the IPO documentation.

The Turkish company also claims to be far more sustainable than its peers with a Sustainalytics Rating of 14.7, low-risk, as opposed to Genesis’ rating of 41.5, high risk, and Solvay’s rating of 23.9, equivalent to medium risk, according to Morningstar Sustainalytics, noted one of the sources.

While logical to command a premium directly related to its higher cash generation powers, as a newly listed company it may not be able to demand quite that valuation rationale from IPO investors, the same source cautioned.

IPO crucible

Pitching itself as at the forefront of sustainability, WE Soda is hoping to benefit from a green premium. Europe's best performing large IPO so far this year offers a hopeful read-across.

Italy’s EuroGroup Laminations [BIT:EGLA], which after initial poor trading has surged above IPO price in recent weeks, had a strong ESG component to its story given its focus on components for electric engines.

But green credentials alone might not be enough to counter the difficult IPO market, with investors reeling from recent losses and demanding hefty discounts.

The most recent IPO, Italian gaming company Lottomatica [BIT:LTMC], came at a reasonable discount to peers and what was deemed fair value by many, but even then the deal traded down in the aftermarket.

“It’s not just about cheapness as was shown by Lottomatica,” said one of the sources. “The question is whether there’s going to be any aftermarket support.”

Three of the sources speaking to the Pulse this week acknowledged that the IPO market is extremely tough but hope WE Soda’s economic and environmental strengths will give it a boost where others have struggled.

The flood of meeting requests, over 500 after the first week of marketing and many from long-only investors, support expectations, they said.

All will be revealed on price once investor education begins this week.

WE Soda declined to comment.

Analytics by Raj Sajya

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