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Philosophers Stone LLC

NEW INVESTMENT THESIS

Rollup Companies

A rollup is a company that was or is being built by making


acquisitions of existing businesses, for the most part, rather than
being built new from the ground up with organic growth.

The words platform company or conglomerate or possibly a


SPAC can all be used to refer to a rollup company.

Rollup Companies

There are many advantages to starting and building a rollup


company.

Ability to build a company rapidly with no original ideas or innovations.

Combining companies can create synergies that can save money.

Smaller companies combined can have a stronger financial standing and


improved access to financing for less cost.

Rollups can be highly diversified which is attractive to investors.

Publicly traded rollups can purchase privately held companies thus


taking them public in a back door IPO.

Larger companies can have higher market valuations on the equity


markets than smaller companies can independently.

Rolling up fragmented industries can rationalize competition.

Successful Rollups

There have been a number of highly successful rollup


entrepreneurs.

Kraft foods was originally a roll up in the dairy industry which later
ventured into acquiring snack food and grocery brands.

Wayne Huizinga is a highly successful rollup entrepreneur who built


companies Waste Management, Blockbuster Video (failed
eventually), and AutoNation.

Valeant and Actavis are successful rollups in the specialty


pharmaceutical industry that were started by equity funds.

Failed Rollups

While some rollup companies have seen huge success, most


others have failed.

In the 90s roll up companies were very much in vogue.


Entrepreneur Jonathan Ledecky started a number of rollup companies
that had boom and bust life cycles.

US Office Products had a huge run beginning in 1994, but declined badly
by 1998.

USA Floral Products failed to create value for investors.

Rollups also tend to be afflicted by fraud; MCI Worldcom, Philip


Services, Westar Energy, and Tyco are examples.

Research has shown that around two thirds of rollup companies have
failed to create value for investors.

Lessons Learned: Formula For


Success In Rollup
Entrepreneurship
Successful rollup operations have the following characteristics.

Businesses have significant and durable competitive advantages.

Run by outstanding managers.

It makes sense to merge businesses (synergies).

Prudent leverage used.

Ideally have low overhead and high free cash flow (money can be taken
out of the business to buy other businesses to compound returns).

Each business has solid growth and good future growth prospects
individually.

Diversified holdings, or at least not excessively cyclical.

Stock of rollup is held in high regard, business owners are willing to


convert their equity into stock of acquiring company.

Case study: Berkshire Hathaway

Warren Buffetts stock picking acumen is well known, however much


of his success has come from buying whole companies. In addition
to holding over 100 billion in equities today, Berkshire has purchased
90+ companies. Berkshire is a gigantic diversified rollup.

You can see Berkshire owned brands by clicking here.

Many of them are brands you know. All companies have significant
competitive advantages. Usually valuable branding, significant industry
position, or niche markets.

All have outstanding management, usually in place before purchase.

Most have high free cash flow and are financially sound with good prospects for
the future.

Cash flows are used to purchase different businesses to compound results.

Business owners are more than willing to accept prized BRK.A stock above net
asset value as payment when they sell to Berkshire. This gives them the
ability to make huge acquisitions. The reputation of BRK.A stock is paramount
to this end.

Businesses are happy to be under the Berkshire umbrella.

BRK.A Spectacular Returns

So as everyone already knows, the Berkshire rollup machine


along with the market investing activity resulted in huge returns,
though as it got bigger the effect diminished.

Coulda Shoulda Woulda

The caveat to the Berkshire acquisition compounding business


model is that it has to keep consuming more and more
businesses to keep the compounding going.

It has gotten so big that recent acquisitions have gotten ridiculously


huge. Late additions include $26.5 billion BNSF railway, $9.7 billion
Lubrizol, $4.7 Duracell, $14 billion for 50% of Heinz, $4.5 billion
Marmon Holdings, ect

Its so big that the good returns have already been had (mostly from
80s to the late 90s), though I still think Berkshire will do well.

If you are thinking that you wish you would have signed up back
then, I have good news. I found someone who is using the
Berkshire business acquisition compounding model very
successfully.

Key Man Martin E. Franklin

Bio.

Franklin comes from a family of financiers in London and is well


connected.

Upon graduating business school he was tasked with dismantling a


company in a corporate raid type of deal for his father.

He created good value selling off the parts of the company, but
decided he wanted to be a builder of companies and not a
dismantler.

His family/friends granted him access to capital and he set about


building a rollup company.

Franklin started by buying a large position in Alltrista, a


struggling canning company, and installing himself as CEO in
2001.

He changed the name to Jarden and began acquiring other


companies to build his rollup.

Franklin focused on acquiring companies with branded


consumables, seasonable staples, and niche brands because
they have large competitive advantages and strong free cash
flow.

He used free cash flow, debt, and stock to compound his


business results, much like Buffett does with BRK.

The Jarden brand earned a strong reputation among business


owners and investors.

Jarden Brands

Many Jarden brands are things that you use every day.

They have 3 main categories; branded consumables, outdoor


solutions, and consumer solutions.

You can see the long list of Jarden brands at their website HERE.

Its all stuff that you see filling Walmart and Cabelas shelves.

True to the compounding strategy, acquisitions have gotten bigger


and bigger with the latest acquisitions being $1.8 billion Yankee
Candle and $1.35 billion for Waddington.

The return on Jarden stock since 2001 until now is absolutely


mind bending. The business model proved itself once again.

Spectacular Returns

Jarden investors have enjoyed around a 45X return on their money


since Franklin took over in 2001. That amounts to around a 30%
annually compounded return over 14 years.

The market loves a company with strong organic growth and gives it a
high valuation based on future projected growth. Investors do not
know how to value a bolt on acquisition growth company like Jarden
because it is not known what Jarden will buy next and therefore difficult
to make future projections. Due to this issue, Wall Street does not
value it the same way, so it has been perennially undervalued. The
stock rises when an acquisition is announced typically.

The value of Jarden stock was derailed by the financial crisis, however
the strong competitive advantages that Jarden products possess held
up and the market eventually rewarded patient JAH shareholders with
large gains from the beginning of 2012 and onward. Jarden has proven
that it is strong in times of crisis.

Near the end of 2013 Franklin announced that he would be


starting a new acquisition company called Platform Specialty
Products, or ticker symbol PAH.

PAH was to be a rollup company for specialty chemicals companies


that featured an asset lite, high touch business model.

Franklin lined everything up and secured initial funding by issuing a


blank check IPO to the market. Franklins sterling reputation due to
the success of Jarden was instrumental in PAH securing billions of
dollars in funding.

The blank check IPO was held at an initial price of $10 per share.

Franklin has found a friend in highly successful investor Bill Ackman,


who purchased around 20% of PAH stock.

Initial Acquisitions

The first company PAH acquired was MacDermid, which produces


specialty chemicals for the electronics, industrial, offshore
drilling, and printing industries.

Next several agricultural chemical companies were acquired;


Agriphar Group, Chemtura, and Arysta LifeScience.

MacDermid CEO Dan Leever was installed as CEO, with Franklin


serving as executive chairman.

The company believes it can save around $65 million annually by


exploiting synergies between the three ag chemical companies.

Pah recently acquired Alent which is expected to create synergies


with MacDermid.

Why Specialty Chemicals

Specialty chemicals companies are perfect for the previously


described rollup compounding business model.

Specialty chemicals companies are low overhead and high free cash
flow because they do not make chemicals, they just mix them.
Chemicals are purchased from a high overhead business such as
Dow, Du Pont, or BASF and mixed using proprietary formulas and
then sold to end users. They can grow without building huge
factories.

The industry is highly fragmented, there are tons of easy


opportunities as no one has tried to roll up chemicals companies
before.

Many of these companies have strong competitive advantages and


have shown solid consistent growth and free cash flow..

Nomad Foods

Franklin has started another rollup company recently called


Nomad Foods to combine frozen prepared food companies.

Investment Thesis

The thesis is simple: Martin Franklin is a complete stud and his


strategy of rolling up companies with large competitive
advantages and cutting costs as well as rationalizing industries to
create shareholder value is tremendously successful. We do not
know what companies PAH will acquire, however I am willing to
give Franklin the benefit of the doubt. The plan is to hold shares
indefinitely.

I have purchased PAH stock as of now. I am considering JAH


stock but have not purchased it yet. I have not studied Nomad
Foods yet, but I may buy that also.