SIRE - Sisecam Resources LP: Another Lowball Take-Private Offer

Summary

• Sisecam Resources LP ("Sisecam") posted strong results in Q4 2022, and the underlying earnings were even better.
• Unfortunately for common unitholders, it looks like the partnership will be taken private in 6 months time, at $25 per unit.
• This price does not reflect the value of the business, which benefits from multiple tailwinds.

Don't underestimate the other guy's greed is a recommendation that goes well with the MLP space, where conflicts of interest between the GP (General Partner) and the common unitholders can lead to unfavorable deals for the latter. The recent announcement by Sisecam Resource Partners LLC, the general partner of Sisecam Resources LP ( SIRE ), that it would take the MLP private at $25 per unit, is further proof of this.

Granted, $25 is less of a steal than the $17 that the GP was contemplating initially, back in July 2022. Still, this price does not reflect the value of the business, which has been going from strength to strength on the back of supportive supply-demand dynamics, and a widening cost advantage for natural soda ash producers in Wyoming.

The pricing of the take-private offer has, formally, been approved by a committee of "independent" directors, but this does not guarantee the fairness of the offer. My understanding is that the GP needs to control 80% of the units to force minority holders to sell theirs. The GP already controls 74% of the units, so the 80% threshold will probably be reached, unfortunately.

If the deal goes through, the public will be deprived of the only listed pure-play soda ash producer. For some exposure to this space, the closest remaining alternatives would be Natural Resource Partners LP ( NRP ) and Genesis Energy LP ( GEL ).

The Offer Is At Odds With A Fair Valuation

Let's see why the $25 offer looks way too low in light of Sisecam's fundamentals. First, the Q4 2022 results, which were also released last week, confirmed the great shape of the business, with earnings of $0.83 per unit in Q4, and $3.13 for the full year, on the back on high international soda ash prices.

On this basis alone, the offer values the units at a paltry 8 times TTM earnings. What's more, Sisecam actually sold lower volumes than usual in Q4, a timing effect coming from logistical issues that saw some shipments pushed out to 2023:

The decline in soda ash volumes sold versus produced in the quarter ended December 31, 2022, was due to operational challenges in loading export volumes at December 31, 2022 year end. We expect these unsold volumes will be loaded and sold in the first quarter of 2023.

Without this temporary 27% reduction in international sales, the gross margin in Q4 2022 would have been potentially $24 million higher ($200 margin per ton x 120k tons). This would have resulted, per my calculations, in more than $1.20 per unit in net earnings, 50% higher than the $0.83 reported. Call me a conspiracist, but I don't think the GP was too upset that "operational challenges in loading export volumes" reduced Q4 earnings in a timely manner, ahead of the take-private announcement.

Looking forward, the undervaluation gets even more blatant. 2023 will benefit from the renegotiated yearly contracts in the U.S., while international prices are expected to remain elevated.

Furthermore, on the cost side, margins could get a boost from plunging natural gas prices in the U.S.

All things considered, I expect earnings per unit in excess of $5 in 2023, meaning that the offer values the business at 5 times forward earnings.

How Fair Is The Offer?

As always in such cases, the GP insists that the price was approved by an independent Conflicts Committee (note how many times the word "independent" is used).

The Board of Directors of Sisecam Resources Partnership LLC, the general partner of Sisecam (the “GP Board”), delegated to a conflicts committee of the GP Board (the “Conflicts Committee”), consisting of the GP Board’s three independent directors, the authority to review, evaluate, negotiate and approve the transaction on behalf of the GP Board. The Conflicts Committee, after evaluating the transaction with its independent legal counsel and independent financial advisor, unanimously approved the Agreement, and recommended that the GP Board approve the transaction.

Source: Sisecam's press release

The Conflicts Committee was, presumably, made of the following three individuals - whose probity I do not intend to question.

The problem is that there is little incentive, from their perspective, to challenge the parent in the name of common unitholders. They possibly helped reject an offer as low as the initial $17 per unit, but they were not going to push for a $30 or $35 revised price, which would better reflect the value of the partnership.

Now What?

What can retail investors do at this juncture? In an earlier article, following the initial $17 offer, I explained my understanding of the majority needed by the GP to take the LP private (see Here ). I still hope the offer will be rejected, but I've seen this movie before. In 2021, I saw two excellent LNG businesses, that I planned to hold for the long run, be delisted. Now the same thing is happening with a wide-moat gem like Sisecam.

For now, I will wait before selling my units, in case some large independent shareholders decide to take action. The most optimistic investors might increase their position (those who did so at $17 have done well for sure) but I'm skeptical about the chances of an improved offer. What's for sure is that it's always frustrating when you try to build a long-term, buy-and-hold income portfolio, only to see someone else pull the rug from under your feet.

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