Yet Another Value Podcast - Conor Maguire's "Deep Breath, Deep Value" thesis on SOL Group

Episode Date: July 1, 2022

Conor Maguire, founder of valuesits, discusses why he thinks SOL Group is a Buffett-like stock trading at an attractive multiple with the possibility of a private equity takeout over the next five years.Conor's SOL write up: https://valuesits.substack.com/p/deep-breath-deep-valueChapters0:00 Intro2:50 SOL overview4:50 What is the market missing with SOL?9:00 Why a private equity firm would like SOL14:55 Would regulators be ok with a private equity deal for SOL?18:10 Why would the family want to sell SOL?23:10 Diving into the technical gas business25:20 How does Europe's nat gas crisis impact SOL?29:20 What's the long term obsolesce risk for SOL?33:20 SOL's carbon capture call option38:15 SOL's home care business43:20 SOL's emerging businesses49:30 What else is Conor seeing in the market?

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greatest speed and build out their model database at a rapid pace, while their final layer of human analysts ensures total accuracy of their models. You can even update KPIs for multiple different companies in an industry model that allows you a bird's-eye view for better idea generation. Save time with Delupa to do more value-added work. No more data errors, no more Excel monthly. just the fundamentals all at your fingertips all right hello and welcome to yet another value podcast i'm your host andrew walker for those of you listening to on the youtube my dog pennies back

here making her first appearance uh if you like this podcast it'd mean a lot if you could rate subscribe review it wherever you're listening to but today i'm happy to have on for the second time my friend connor mcoyer Connor is the founder of the value sit substack Connor how How's it going? Good, Andrew. Yeah, good to be back on. Thanks for having me. Hey, thanks for coming on for the second time. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone, nothing on this podcast is investing advice. Please do your own work, do your own research. We're actually going to talk about it's a pretty good-sized company today, but it's a little on the liquid side. The family controls about 60% of it. Tweedy Brown's got another 8%. So the floats on the smaller end.

So everybody should just keep all those in mind, maybe a little extra risk here, but please keep you. that in mind. Second, a pitch for you, my guest, people can go listen to the first podcast for the original pitch if they want a full one, but I don't know any better pitch than say you turned your podcast to a paid substack about a month ago, and who was subscriber number one two minutes after you switched over to fade substack? Yeah, you were straight in there, Andrew. Yeah, you were number one, all right, so no, thanks for your support on that. No, look, I woke up and my email, the first email in my inbox was you announcing it like three seconds after I have my email and I was just boom instant but look I love your work and that's why I was

subscriber number one and that's why I'm happy to have you back on the podcast so all that out the way let's turn to the company we're going to talk about today you had a very clever name for them the company is soul group the name of your post was deep breath deep value which I thought was really good but I'll turn it over to you what is soul group why is the title deep breath deep value all that out. Yes, so thanks, Andrew. So Sall Group is an Italian listed industrial medical gas business. So it's listed on the Italian Stock Exchange. And as you said, it's 60% controlled by two controlling families. So the current management team are the third generation of the two families to lead the company. So I mean, Sol Group basically provides or it produces industrial medical gases. So principally, oxygen, nitrogen,

hydrogen, carbon dioxide, helium, and then some other niche specialty gases, and it provides them across the various industrial sectors and into the medical sector. So if you think about any kind of modern industrial and manufacturing process usually requires that some part of the production process, oxygen, nitrogen, hydrogen and so on. So these are really essential gases or commodity inputs into industrial processes. And so that's one of the production process. And so that's one side of the business, that's approximately about 50%. And then the other 50% is really on the healthcare side. So, again, they provide gases like oxygen, hydrogen, carbon dioxide to, you know, hospitals, home care facilities and also kind of home, you know, home respiratory services, you

know, for example, you know, ventilators for people who are at home, not in a hospital setting, but that require regular, you know, specialty kind of medical care. Perfect, perfect. So there's a lot of stuff to dive in there. A lot of comps, a lot of other things we can talk about. But I guess I want to start with the question I start with and everything. There are a lot of investment opportunities out there. Like this is a reasonably large company.

People have known for years, we'll probably talk about private equity's interests and stuff. People have known for years that medical gases and these types of things, industrial gases, are a pretty good business. So my first question is just, what is, what are you seeing that the market's missing that makes, I mean, in your, in your write-up, you know, you say, hey, in a base case without a takeout, this can basically, it's done 20% annualized for the past. I think it was 20 years. And you think it can do it 20% annualized for the next 20 years.

So what are you seeing that kind of the market is missing in this company? Yeah. So, I mean, I think this, I mean, what makes this stock interesting to me is that it has kind of three different attributes all in one. So firstly, I'd say this is kind of like a, actually, you know, kind of a Buffett-type stock in that it's a very, very stable, very well-run, reasonably good return on capital business with very predictable earnings. So this is, you know, this is what I call it kind of a structural winner in that,

you know, for reasons that we could get into in terms of the particular business model and the industry setup, this, I mean, if you look at a chart, you know, this business has consistently grown earnings and EBITDA over the last 20 years, and its EBITDA margin is kind of a rock solid 23% throughout that time. So it's a very stable, very predictable business. Number two, that's the first reason. So the second reason why it's interesting is that it is clearly undervalued. So this business trades at about seven times EBITDA and its larger peers such as Air Liquid and Lind Group

trade at about 12 to 14 times. Similarly private market, similar private market assets have traded at 12, 13 times EBITDA, EBITDA as well. So relative to the comps, this is very, very, very cheap at seven times EBITA. And there's particular reasons why that might be. But I think, again, it's mispriced even considering those reasons. And then I suppose thirdly, this is kind of a special situation as I see it in that. It has no sell side coverage. It's completely overlooked by the market. So that's probably one of the main reasons why it's cheap. No one really knows about it. And number two, and this is kind of of what I think makes it really interesting is that this is a family run and operate a business

for generations. The current senior management team, from my understanding and from my own research, are likely to retire within the next five years. There's no one else in the family to take on the management role and CEO role. And the likelihood is that they will probably cash out to private equity within the next five years. There isn't really anyone within the family, as I understand it, that would take take over management. And so they've received numerous approaches by European private equity houses over the last number of years.

And, you know, haven't sold as yet, but I think just given the multiple arbitrage, the age of the senior management team, and with no successors, you know, it's an obvious, you know, it's an obvious take private candidate. And, you know, the current market cap 1.5 billion, you know, this is easily worth double that,

you know, in a cash out scenario. I want to dive into a few things in what you just said, and then we'll probably go a little deeper into the business and sort of the back half for the podcast. But the first thing you said, this is a Buffett-like business. It's funny you said that because when you said it, I started remembering, I was like, hey, you know, so there used to be air gas and I believe Praxar were two big U.S. were two big U.S. were too big U.S. And I was like, wasn't air gas a Buffett play? And it wasn't a Buffett play. But if you go and you look, Bill Ackman in 2013, he made his biggest bet ever on air products. He said it's the biggest investment I've ever made, $2.2 billion. And he called it a Warren Buffett business. And obviously, Ackman follows like a Warren Buffett like style. So these are businesses. I don't think Buffett's invested in before, but these are Buffett like businesses. Exactly what you said. Stable products, good returns on cap. advantage, all that type of stuff. And then this, let's dive into the second thing. So I do think a big part of the thesis here, and again, we'll go into the business itself

in a second, but a big part of your thesis is, hey, this is a hundred, almost 100 year old business, the founding family, they control it, they own it, they own 60% of it, they've got the management team in here, they're getting up there in age. They're going to turn 70 in the next few years. And when they do, you say, hey, a private equity style takeout is like. So I want to dive into that a second. I know private equity firms have been, have tried to take these guys up before. Why don't you discuss that history? And then I might push back a little bit on the private equity side. Yeah. So, I mean, as you said, I mean, there's, Bill Ackman was

well known in kind of his previous interest in the sector. And, you know, there's been a lot of consolidation. So two major, major deals that have happened in the space in the last kind of five, 10 years have been, firstly, air liquids acquisition of air gas in 2015, which created the global number one player and then following that a couple of years later, Lind Group, the German business acquired Prax Air, and that created then the number one market leader.

So with those two acquisitions, that really consolidated the top end of the market. And so there's only really, with air products now in the US, the only remaining kind of of the big three. Outside of that, there's one or two players in Japan. And then you've got some smaller regional

players of which Saul is one of the bigger and then there's another privately held German business as well, very similar, slightly larger revenues, but pretty similar. So, you know, the industry has consolidated significantly in the last number of years. And, you know, when you look at kind of the, the earning, the consistency of earnings, the, you know, the business model in terms of very stable cash flows, contracted long-term customer contracts, this lends itself really well to kind of, you know, leveraged buyout transactions and, you know, the cash generation is very strong as well. Another point I think is particularly relevant at the current time is that all these contracts

are inflation linked. So, you know, they pass on, you know, electricity and energy are the biggest input costs in these businesses. And because of the essential nature of these gases that are sold to industrial medical customers, they're able to pass through those cost increases. There's it's like one or two quarter lag, but generally they pass the cost increases on. So, I mean, when you look at that type of setup in the current market, I think, you know, this is the type of business that private equity would be very attracted to, especially when you look at the discounted valuation. And your article mentions that private equity has approached Seoul before. Can you go into the background of private equity's history with Seoul? Yeah, so these weren't public,

you know, at the time publicly reported thing, but, you know, from Tug to management, management and analysts to cover the industry, it's known anecdotally that private equity have approached the business in the past. So, you know, in terms of actual deal terms, they're not, they were never publicly disclosed, but I know there's been an ongoing conversation and this has been on the radar of a number of private equity houses in Europe for a number of years. And when you talk to Mention and they say, hey, we've been approached before, we've rebutted them. Why did they say they rebutted private equity firms in the past? Certainly because they did, I mean, five years ago, in the last five years, they haven't really

been ready to sell. They're content to hold on to it for now. But as they have tried to kind of figure out succession plans, but, you know, that time, that window of time to kind of, you know, for the succession plan to be implemented is kind of narrowing now. And, you know, the likelihood is that there won't be a family member. And rather than kind of appoint someone from outside the families to take on leadership roles, you know, they would rather just cash out and sell. Yeah. So, and that's based on your talks with them is kind of what you're thinking?

Yeah, I mean, I've spoken to management. I've also spoken to people in the industry as well and you have kind of corroborated. That is their sense as well and from separate conversations they've had. No, it makes total sense because I guess, the pushback I would have on the private equity idea is this is a 100 year old company and yes, the family owns 60 percent and there's going to be discussions. But if I was the family, I'd be like, cool, I own 60 percent. Like, why am I going to go sell this to a private equity firm when I've got this business? I control it. That gives me some influence. Like, I've seen it

a hundred times. Just keep your 60 percent throw it into trust for the whole family and just be your own private equity firm, right? Like just go hire an outside manager. Keep 60 percent control and keep this kind of keep this public, but keep it kind of a controlled family public thing. You get the, I don't know, there's plenty of U.S. companies, none are like jumping right off the top of my head, but there are

plenty of U.S. companies that have pulled this, right? Mars family. I don't think Mars family actively operates the business anymore. But if you look at the richest people in the world, like 20 of them are from the Mars family because they own M&M, they own Mars. And, you know, it's just a professional

like kind of private business at this point. Yeah, well, I think one other factor in this is that the public markets clearly are never going to value this business at what it's really worth. And as I said, the multiple arbitrage between this and some of its larger periods and some of the private market deals that have been done in the space is just so wide that, you know, I think that's a sufficient incentive for them to kind of maybe think, okay, you know, there's no one else in the family to take this on. There's a big potential, you know, liquidity event for the family. And it's actually, so it's actually two families involved. So, you know, I think the kind of the agreement there is, or the understanding is

there that if they can't keep it within the family, you know, a liquidity event and a cash out is the next best thing. Would there be any politics involved with that? Because I've seen family-controlled Italian companies before that have tried to sell, and I say Italian, but probably European, and heck, at this point, probably all across the world, but family-controlled companies that have tried to sell to private equity. But I think it's particularly in Europe, up where the European regulators say, oh, we don't like this, right? Like private equity, scary, going to put leverage on the balance sheet, might try to close down some underperforming plants, might try to fire some employees.

And like, I have seen European companies block, family controlled, not fully black, but they can make life really hard for making that type of control. So do you think there'd be any issues? Because an industrial gas business employs a lot of people, it buys a lot of power, not just directly, it employs a lot of people indirectly, too, right? critical for, it's almost critical infrastructure because it's power in hospital. So do you think there could be some political pushback on that? In this case, I don't think so because of the relative size.

I mean, if you were looking at a much larger player like, you know, an Air Liquid or someone like that or someone of that approaching that type of scale, yes, I think the implications of a private equity buyout would be more significant. But in this case, I mean, this is a one billion revenue business. in the overall, it's an important business in the markets that it operates in, but in the overall scheme of things, I don't think a private equity acquisition of it would be material enough to prompt regulatory or political concerns. Okay.

You mentioned multiple arbitrage a few times, right? This trades for about seven times EBITA on the capital markets currently, which look, seven times EBITA, even after a pretty decent market's all off recently, I would say that's the price of a below average business probably gets. I'd say a normal business probably is eight to nine these days. A good business is 10 to 12 plus. And that's just very general, right? Very general.

But that would just be rule of thumbs and adjust for all sorts of other stuff. But you've mentioned multiple arbitrage a few times. This trades for seven times. What does a normal air products company trade for? What do they tend to trade for in a takeout? It doesn't matter if the takeout's private equity versus strategic, all that type stuff. Historically, kind of 12 to 14 times for comparable businesses. So, you know, the most direct comp is when the, I think it was when it was the Praxair acquisition happened back in 2018.

I think it was the, they had to sell their European assets to a Japanese company Nippon Sanso. And that was the European assets with about 400 million EBITDA. Saul has about a 260 million EBITDA. So ballpark kind of scale. and that traded for 12-and-a-half times or 13 times to nip on Sansa. So that's really the benchmark, and that's actually a benchmark valuation. When I ask management, what did they think the business would be worth or should be worth at a fair consideration?

That's the type of multiple that this type of business would merit. Yep. So almost, I mean, again, trades for seven. You just listed to combat 13. We'll round up and say the multiple would almost be double. what it currently trades for. And there is a little bit of leverage here. We'll probably talk about leverage and everything in a second. So you're talking more than a double on the shares if we woke up tomorrow and they were sold for the multiple that you thought they should go for. Correct. Yeah,

exactly. Perfect. Okay, so let's let me go to my second favorite question, right? This is a family that owns 60%. They know the business really well. They've communicated to you and I think they've communicated across the board, hey, this is a good business that deserves a trade for a multiple much higher than we're currently trading for. We can talk more about leverage and second, but this is a under levered company, I would say. It's a little bit over one-time's leverage if I'm doing that math in my head correctly. Businesses like this can generally support a lot more leverage than that, right? Very consistent, economically resilient business. You can support a lot more leverage. So my first question would be, why aren't they, they know the values there?

Why aren't they going out and buying back shares? I know they do acquisitions, but they've got plenty of liquidity. They could do both if they want. Why aren't they taking advantage to the multiple? Yeah, I mean, I think this is, you know, as with a lot of family companies, this is a very conservative finance business. I mean, it's just slightly over one-time's geared. Historically, it's going to maintain that type of gearing. I suppose, you know, this is, I mean, why aren't they buying back shares? I mean, this is effectively like, it's almost like a privately held business that happens to have a, you know, kind of a legacy public listing.

So, you know, they don't have any analyst coverage. They don't hold investor days. So, you know, they're not really, you know, they're not really minded to kind of, you know, drive, you know, you know, drive value through buybacks or other kind of financial engineering, you know, they're kind of content just to let operate the business and continue to grow it. And, you know, one of the things, I suppose, in terms of capital allocation is that they have invested on a relative basis, they've invested more in growth capex than their peers. So, and a lot of that is through Bolton acquisitions, particularly on the, on the home care, residential care side,

of the business where they've bolted on smaller operators. And then there's a kind of a multiple arbitrage there where, you know, they're buying these smaller, smaller units or businesses at, you know, maybe four or five times EBITDA, bolting it in and, you know, in a, you know, in a fair market, I suppose, you know, they're easily worth double that. So I think that that's really been the focus in terms of capital allocation. They pay a decent, you know, small dividend that has grown over time as well. But again, as I said, they've been content to kind of focus on operating the business without getting too, you know, focused or distracted on kind of returning capital and, you know, levering up the business.

All right. So that covers the special situation side of the business. So, but there's another part of the business, right? Like, it would be great if we woke up three months from now, three years from now, five years from now. And the management said, hey, succession planning part of the business. business. We're selling this to private equity for 12 times EBDA, 14 times EBDA, and the shares would more than double, and we do great. But I think there's another thing where, hey, this is just a good business. We mentioned it's a Buffett-like business. It's done 15 to 20% IRA on the open

market for well over a decade at least. So there's another side of this business where it doesn't sell, and you and I just wake up three years from now and we say, hey, EBITA's grown, the business has done great. We've done really well here. So let's dive into the core business. The core business is the technical gas business. And then they've got the home care and some other stuff we'll talk about, but the technical gas business, I think if you've never looked at this and you and I said, oh, this is a Buffett like business. You would say gas, like they're literally just taking oxygen from the air. Like, why can't everybody go and do this? So can you just dive into like, what is the core technical business and why is this such a good business that we said it's a

buffet like business? Yeah. Okay. Yeah. So, I mean, the key attraction this business really is that it takes, you know, when it produces gases such as nitrogen, oxygen, argon, helium and so on, these are essential commodities for most manufacturing and industrial processes. So this business has a pretty high barrier to entry in terms of, in terms of it, it's capital intensive to get up and running. You know, it uses a lot of heavy, heavy plant equipment such as air separation units and so on. So it takes atmospheric gases, it breaks them down into the component gases such as oxygen and so on. And then it kind of distributes these or supplies these gases to industrial and manufacturing customers, you know, in a number of different ways. And these are all subject

to long term contracts. So, you know, what makes this a great business and, you know, is that they're so tied into their customers' operations. So for example, in some, some, some customers will, you know, they'll have a pipeline directly into that customer's production facilities. And so, you know, the switching costs to that type of delivery is so high that that that revenue stream is nailed in or nailed on. It's literally the best switching cost, right? Like, the only way you could switch, because as you said, it's a pipeline from the plant directly to your customer. Like, the only way you could switch is, I guess you could start hiring trucks to bring in, like, canned gases. But that, that's so expensive. And that's why, like,

Any pipeline business, many of them, I don't believe any pipelines here are regulated, right? But many people do, like oil and gas, pipelines get regulated because once you build, it's a legitimate monopoly, right? There's no other way. And you can just start taking all these excess profits. So that's why it's so great. Let me ask two questions on the gas business. So the first question, right? Like, I did some write-ups and some work on Party City, and I actually have been meaning to finish those write-ups.

But Party City basically gets helium from people and they distribute helium in stores. and Russia invading Ukraine, it turned out a lot of helium came from Russia slash Ukraine, and now there's this helium shortage that's going around. And I know a lot of gas is, like you say, oxygen, and we're not going to be short of oxygen, but a lot of gas is actually we have had shortage issues with. So are they having any issues with kind of the supply of the base gas and everything coming into them? Have they run into any of that? No, I mean, in the case of helium, that's quite a niche gas.

And while it's all due provide it, it's not one of their main gas. I mean, there are four main gases, which are about 60% of their production are oxygen, nitrogen, carbon dioxide, and argon. So, you know, in terms of kind of being able to continue to supply, they don't really have any issues there. So, no, so they're kind of insulated from some of that risk. And the second question I had. So you mentioned when we were first starting, you said, hey, these contracts are CPI inflation linked, which is great. Everybody, it's not going to be surprised to anyone who's listening to this podcast that inflation is running high. But I was concerned, like, look, a big piece of this is you take the base gas, you put it through whatever they do, and it takes energy costs.

And anybody who's familiar with, these are your, most of their business in Europe, and energy is mainly coming from natural gas. And Nat gas, I'm just looking at my screen, you know, I think it's TTF Dutch gas. It's gone from 55 last year to as you and I are speaking, it's about 132, right? So it's almost tripled and inflation is not tripled. So one of my concerns, and I think it was either your write-up at the annual report where they said, hey, the cost for us to process gas, it used to be the energy costs were like used to be 50% of our revenue and right now they're running about 90%. I think it was your report. It could have been annual. Yeah.

I was concerned like, yes, they're CPI linked, but their cost piece is running so much higher than CPI. Like are they going to run into issues? Does that make sense? Yeah, so I mean, that was one of the questions I'd put to management when I spoke with them. And I think, yeah, so historically pre kind of the current, you know, energy crisis, the energy and electricity costs are about 60% of their total cost base. That's about 90% now because of just the, you know, what's happened with inflation. And so, yeah, that's the obvious risk to this in terms of earning power.

But again, coming back to the fact that these are, you know, these are essential gases. There's no substitute. and the customers are tied into contracts. So they're able to, they have an ability to pass on these costs. And so that's what they, that's what they've been doing. And that's what I expect to see kind of in the second half of this year.

They don't report, a lot of these companies like this in Europe don't report quarterly. It's kind of interim half year and full year. So, you know, I would expect kind of through, towards the end of the summer when the half year report comes out, that you will see, I mean, I'm not saying they're going to be immune from it. There will be a lag, of course, but they have CPI linkage in their contract, so they are able to pass that cost on. And customers generally will have to just, you know, have to eat that cost increase if they need to continue.

I mean, if you're operating a steel blast furnace, you need oxygen and, you know, other gases to operate that. If you don't have oxygen, you can't operate and you're idled. So, you know, that's the essential, I suppose, point coming into play there. come dive into conspiracy corner with me for a second here, right? So right now, let's just use round numbers. Nat gas in Europe is 100, right? And this is up from 50 last year. And, you know, if you go back pre-COVID 2019, it was like 10 or 15, right? And I do wonder if they strike a lot of contracts right now and they base them on, hey, Nat gas is 100, 150, 75, whatever it is. You know, let's say we fast forward three years and Nat gas has gotten under control, right? In the U.S. Nat gas is still six and it's

130 in Europe. And that's going to take a long time to normalize because similar to pipelines, like we've got to build all these LNG facilities and get them over there. But at some point, I would guess Nat gas comes down from 130 just because it's so high on an energy basis. Like, if Nat gas is 20 and four years, I wonder if they're going to have a bunch of contracts that were struck when Nat gas was 100, where their energy costs have come so far down that they're actually super profitable because there's CPI linked on the upside. I don't think they're going to be like kind of on the downside with this energy cost. Does that make sense? Yeah, no, I mean, that that is a valid point. I think, yes, you know, the whole purpose of the CPI linking is to protect

them and cost rise, you know, and they're able to push through those cost increases. When cost turned the other way, there's, I suppose, less, you know, they're able to, well, they may over time, of costs, you know, to really drop dramatically. Customers are obviously going to look to kind of, you know, look for some relief on that. But, you know, they are going to be able to capture some excess profit in that type of scenario, you know, because I suppose just with inflation now being a more, you know, possibly structurally higher for longer type dynamic, you know, I think that they will be able to kind of keep that, keep some of that cost increase. what what kills this business you know so it's again industrial gases used in hospitals used in industrial processes like there's not a lot of obviously the first thing that comes to mind is oxygen when a patient is going under like there's not really a replacement for oxygen

is there any long-term obsolescence risks here i've just been thinking a lot about like what kills a business because for years if i can go on a tangent for years everybody has said what kills Google, what kills Facebook, all this type of stuff. And it's hard to imagine, but like, I saw something where TikTok, a growing share of searches are on TikTok, like TikTok could actually kill Facebook. I don't think he kills Google, but it could actually kill Facebook. And TikTok actually could kill legacy media because the competition for time is going up so much between video games, TikTok and all this sort of stuff. Like, there's just less time in the day to turn on HBO or watch Netflix. And this isn't all that's driving Netflix to stock price. But you can see some

of that in the media company stock price. So with these guys, I've just kind of been thinking, like, over time, what kills them? Is there any obsolescence risk to, obviously not oxygen, but just the products in general? Or what do you really worry about at night with this investment? In terms of obsolescence risk, I mean, I don't really see much of a, much of a risk on that in terms of the, I mean, if you're talking about kind of their facilities and their production, you know, capability, I mean, they invest a pretty healthy amount in R&D and in growth. and also in terms of their maintenance, capex. So it's a very well-invested business.

And so from that point of view, in terms of equipment and so on, I think they're pretty well positioned. In terms of obsolescence, in terms of the end products, I mean, it's hard to see. I mean, as you said, there are things like oxygen. I mean, for medical end uses. I mean, that's that there is no, you know, that there literally is no replacement for that for, you know,

oxygen treatment and respiratory therapy and so on. And also, I think, in a lot of the production processes, processes, you know, they're pretty well, you know, they're a pretty core part of those processes. I mean, I think if I was to really think about, you know, what could change in terms of maybe something like ESG in terms of how steel is produced. I mean, steel is one of the most, steel production is one of the most heavily pollutant industries out there. And there is a push in terms of how blast furnaces are operated and how to make them more carbon, you know, to decarbonize that. that process. But then again, the flip side of that is that carbon capture is a growing, you know, is a growth opportunity for business like this. I mean, Air Liquid and Linder are very

focused on that. And so, I mean, that's, I mean, that's, that's an area that, you know, Sol, you know, could, can grow into as well in terms of capturing carbon, regasifying it and then, you know, using it then for, you know, other end uses. How do you, again, I, I, you work for this podcast, but I didn't dive into the COPS full and everything. How do air products or how would soul, how does an industrial gas player play into carbon capture? So in terms of, so they would typically, they would, you know, say a customer which emits a lot of carbon dioxide in its industrial, its manufacturing process.

So, you know, solar or air liquid or someone can come in, capture it, capture that carbon dioxide that's emitted and effectively recycle it and then use it for, you know, Carbon dioxide is used in carbonating drinks, food and beverage. It has, you know, is so many end uses. I drink a whole soda water during the podcast. Anyone on the YouTube can see I'm holding up an empty soda stream thing. So I'm very familiar with how carbonated water. Yeah, I mean, so, I mean, that's just one very simple everyday use.

So, so, I mean, that's, I mean, carbon dioxide is used in a huge, you know, in a vast amount of, you know, industrial and manufacturing processes. So, I mean, that's one way in which they can, you know, that they can maybe use that carbon capture as an opportunity to grow. I understand why they would be the person to process the carbon, right? Like you're going to bring the carbon dioxide to their facility. They're going to bottle it, process it, get compacted, whatever it is. But why would they be the person to capture it versus, I honestly don't know a lot about the carbon, but it does seem like going to the actual customer site and doing the carbon

capture? Why is that, why should they own that versus I don't know who the competitor would be, to be honest, but it seems like that's a completely different skill set. Well, I know, because, I mean, it's part of, I mean, you know, at the, I mean, sorry, maybe talking about competitors. I mean, you know, the likes of Air Liquide and Lind are obviously going to do, do, you know, have focused big time on that, on carbon capture. And so, you know, any of the really large industrial plants and facilities, you know, they're obviously best place given their scale and given the relationships with a lot of the larger customers

to do that. But I mean, Sol as a, you know, a pretty decent-sized regional player with a very diverse, you know, customer base, you know, would equally be well positioned to kind of to service that segment of the market. Yep. And you mentioned they do, like, they do a lot of growth cap-ex. They do a lot of bolt-on acquisitions. And, you know, when you talk risk, there is the risk that if they're doing lots of bolt-on acquisitions, that some of them fail or so. But they're doing, again, it's bolt-on, not transformative. So even if someone of them fails. Like, okay, we lost three months of profit, six months of profit. It's not we levered up to five X and like bankrupt to the firm on them. But you also mentioned they do a lot of R&D. And there was

this, I'm trying to find in their slides. There was line how much they spent an R&D. But I was just curious, what do you spend on research and development for industrial gases? Is it new uses for industrial gases? Is it just generally improving your, your kind of method of production? Or what are they spending because it seems like that's a business that's been around for 100 years, there's like not a lot to research, if that makes sense. Yeah, well, I suppose there's this constant kind of need for, you know, in terms of, you know, science and laboratories, universities where there's, you know, new processes, new applications. And so, you know, a lot of the R&D spent is around trying to serve those new evolving kind of requirements and also kind of diversifying into kind of

other areas or other customers. I mean, biotechnology is one field now that they're looking to, you know, leveraging off their experience in the medical space to date and kind of, you know, expanding into that field. So in, you know, implementing that type of expansion, there's a certain amount of R&D involved in that as well. So that's just kind of one example maybe of where they're, of how they're, you know, spending R&D. Perfect. So look, we've covered the, we've now covered the industrial gas side. And I want to, anything else we should be talking about gases or I, I you kind of want to turn it over to the home care business if that works for you. Yeah, no, that sounds good.

Yeah, I think we've kind of covered all the key points on the industrial side. Perfect. So they've been growing into the home care business. And actually, it's been, I think there's, this was a little surprise to be better returns on capital in the home care business. I think they, I think it's almost 50% of the business at this point. So I just wanted to what is the home care business? Why are they get into it? Why are there better returns on capital here?

Yeah, so home care is kind of more like a service business rather than a production business. So I think around 1986, in the mid-80s, they diversify, they made the decision to diversify into kind of the medical and healthcare sector, leveraging off kind of their ability to produce oxygen and other kind of gases that are key to, you know, in the medical field. And so one way they did that was to set up this service business, which is, which is they call the home care segment. So that really involves, you know, calling to people in their patients in their home setting or in residential care facilities, typically outside the, you know, hospital setting and administering, you know, oxygen or other respiratory or other, you know, kind of services. And that includes provision of equipment, ventilators, you know, replacing gas canisters and so on. And so it's really a service business.

And so in that sense, that's how it's kind of. It's capital light and that it's not, you know, they're not, they're not kind of spending huge amounts of capex on equipment and so on. And it's also higher margin than as well. I think, you know, the margins are kind of close to 30% EBITDA margins in that side of the business. And so it's kind of, it's, it's asset light and it's service focused. And so, you know, particularly it's kind of really boomed over the last two years with COVID. And, you know, Obviously, that was a huge, you know, tailwind for the business. And off the back of that, that's continued to grow.

I mean, in terms of, you know, pathogens and respiratory illnesses are becoming more and more frequent. And so that's, again, you know, a kind of a growth area, a continued growth area for the business that are particularly well positioned in. Perfect. Now, so most of their businesses in Europe, and they do have a expanding South American, I think Brazil. They've got some in China, so emerging markets on the home care side. But, you know, I'm U.S. domestic base. And I think for any U.S. domestic listener, when you hear home care business, they've got oxygen therapy, ventilation, telemedicine, when you hear all that, you've got really bad dreams of the home care business in the U.S., which tend to be, they grow quickly, they've got great margins, and then in the U.S. Medicare pays for most of them. Medicare does a huge cost cut because they say, oh, look, there's a cute little home care business that's getting 25% EBITDA margins in this sector.

25% EBDA margin is too high in healthcare, we're going to cut their reimbursement rates by 30% and the business goes from growing and profitable to really flat. This business has grown. I'm looking at their slide for people falling along. It's slide 34 in their full year 2021 presentation. It's grown really nice. 9% annual growth for over 10 years, almost 30% EBITDA margins. Like this is a good business.

But just for my domestic listeners who hear home care, good growth. great margins. Why is this not a business that's like kind of on the chopping block for competition, margin depression, all that type of stuff? Yeah, well, I suppose there's only a handful of operators. There is limited condition and competition in the space. There's only a handful of operators. And I suppose the need, just with aging demographics in Europe, and particularly now post-COVID and we're kind of increased focus on respiratory illnesses and treatment. There's only a handful of kind of companies that can really deliver at scale. And these guys are tied in to either the insurance companies, health insurers or national health services, depending on the jurisdiction, you know, whether it's Italy or Germany or wherever they're providing the service.

So, you know, it's the reliability of the service and the ability to kind of, you know, serve the market that, you know, they've, I mean, in theory, yes, it's a risk. is that going to happen where they're going to be, you know, where the economics are just going to be cut down on them? I, you know, I just, I think it's unlikely, you know, just given the relationships they have in the market with customers and kind of, you know, the level of service, the quality of the service they're able to provide. Perfect. Perfect. So home care versus, again, home care is actually starting to become a really, not starting. It is a really meaningful part of the business, right? I'm trying to do the EBITDA comparison as we speak. But is there a multiple difference? Like, when we started, we were just saying, hey, this business

trades seven times EBDA. Is there kind of a multiple difference in, if we just sold this business, SOTP or whatever, between the air gas side and the home care side? Yeah, I mean, when you look at the competitors and look at the other players in the market, they all, I mean, Air Liquide, Lins do provide kind of similar health care services or home care services as well, a much smaller part of their businesses in relative terms. So, I mean, there isn't a pure play, you know, to break out the multiple, there isn't a pure play trying to see where the market benchmarks, you know, home care versus industrial gas. So all the comps are a kind of a, you know, it's a composite multiple, although probably, you know, more skewed to the,

to the industrial side in terms of overall revenue mix. But then again, I mean, if those Comps are trading a 12 to 14 times, and they have, say, you know, 20% of the business or less is home care, and 50% of Sol's is home care, and that's a higher margin, less capital-intensive business. I mean, that's even more supportive of a higher multiple for Sol. Yep, yep. And actually, I was just looking through sides. When I do it, and I'm sure the company thinks this way, because the first thing they always present is the technical gas side. That's what they're known for that's what they talk about. At this point, I think the home care business actually does significantly more in EBITDA than the technical gas side. It's 160 in EBITDA from the

home care side versus, I think it was 90 in 2021 from the technical gas side. So we talked about gas the whole time. And you actually might say, oh, this is more home care business. So home care does get some stuff from technical gases. So yeah, anything else on the home care business or I want to talk about the two emerging lines as well? No, I think that's it. I mean, it's a, it's a I suppose one other point just on the multiple actually is just, you know, if you look at other kind of similar healthcare focused businesses, you know, you see a lot of, it's been a kind of a typical private equity play in Europe over the last number of years, whether it's, you know, healthcare, doctor services, veterinary clinics and so on, that roll up model where they kind of

they buy and build platforms. And, you know, in the private markets again, those, those businesses can trade, you know, for, you know, 15 times, 16, 17 times. EBITDA. So again, just looking at that as a kind of a broader comparable, again, that's kind of supportive of a higher multiple for Sol's home care business. And they've got two startup businesses. They don't devote a ton of thought to them, but one of them is the biotech business and one of them is the hydro energy business. I've got a few questions on the hydro energy side, but just anything you want to say on the biotech side of the business? Yeah, so there They're both more recent kind of, you know, segments that they're developing.

They don't break out performance for those smaller segments because they're very, very small. I mean, biotech is really an offshoot of the existing medical and home care business. And really, that's a, you know, that's a very new business. So, I mean, that will take time for that to become a meaningful part of the business. And then the other piece, the hydro business is, that's very small. I think it's really, you know, they own, they own some hydro energy plants, but I don't think that, I mean, that they partly serve or, you know, power their own operations rather than being kind of, you know, a whole new service segment. No, just on the hydro side, I thought it was really interesting. And again, I don't know how much, these are hydro plants.

I believe it's six hydro plants owned and operated in Eastern Europe. up. But, you know, as we talked about earlier with Nat Gas, like, this is a business that is structurally short electricity because this is a very energy intensive business on the gas side. And I was just thinking, oh, how clever to have hydroelectrics. And I was also wondering, could there be like a little bit of hidden value there? Because as we've talked about, Nat Gas prices are through the roof, electricity, there's an electricity slash energy shortage crisis, whatever you want to call it in Europe currently. And it doesn't look like if it's getting a better. Owning six, six hydroelectric businesses, like, hydroelectlets baseload, the marginal cost is basically zero to produce. Like, it's probably not too bad to have right now. No, it certainly makes sense. And as I said, they do use it to power their own operations in some of their locations. But it's such a small part of the business that it's not really material to the overall thesis. But, I mean, yeah, in time, maybe it becomes something more valuable.

And certainly it's a positive for the business and that they have that, you know, that maybe as a new platform that they can build on. You never know, right? Because I just look at the slides and it says, hey, this is 120 million kilowatts per kilowatt hour per year of hydroelectric capacity. And I don't know how much 120 million kilowatts hour per year is, right? Like, you could tell me, oh, their businesses take 10 and the other 110 was like making nothing, but it turns out at these electricity prices, it's going to be like just many money

out the roof or you could just say, oh, no, it's just not enough. I had no idea. So I was just wondering if there was something hidden there. Look, I think we've done a pretty good job covering everything here. Anything else you want to talk about on this on Sol or kind of finished up here? Yeah, I think just in terms of, you touched on it earlier in terms of the downside or, you know, I mean, I'm looking at this as a kind of a special situation and that the takeout is real, the driver or the kind of catalyst number one, if you want to call it. you know, set, you know, that aside, you know, a market re-rating, just given the quality of the business, it has no sell-side coverage, you know, if they decide to kind of maybe, you know,

start engaging more with, you know, analysts, investor community, you know, that, you know, that could drive a market re-rating. And, you know, I would expect a business like this to rewrite pretty quickly, just given the obvious quality of it. But that aside, I mean, that's one of the, One of the really appealing things about this as a stock is if it just continues as is and just grows in line with its historic trend, you know, the kind of forward prospective rate of return that you can expect to earn on this is kind of 15 to 20 percent without any multiple expansion. That's just through continued earnings growth in line with trend,

not doing anything, you know, different to what they've done for decades. But there are, that being said, there are growth drivers in terms of G-carbon carbon capture and other, you know, there are other growth opportunities there. But let's assume that they just keep doing what they're doing, no multiple expansion and you get the one and a half percent dividend, modest enough dividend. I mean, that, that breaks back to kind of a, over the next five years, a kind of a 15, 20 percent return. So, I mean, if that's your downside, I mean, that's, you know, downside, I say downside.

Yeah, your downside is one of the best investing records of all time, like 15 to 20 percent. I say downside in the context of the kind of the special sit thesis not playing out. You know, so I think, you know, it's kind of, you know, it's kind of hard to see any real downside to owning this. You know, you can expect a decent, very acceptable rate of return at a bare minimum. And you get the free option of market re-rating plus, you know, plus potentially. at the liquidity event where it's a two to three X in five years time. Yeah, look, I think the downside would be everyone's looked at family controlled companies before that trade for obviously less than they would go for to sellers, to motivated,

to motivated buyers who would like kind of financially maximize it. But here, the nice thing is, A, you're paying a cheap price and it's a management. Again, like 15 years, really good returns. they grow the business, these things. I mean, this is literally just both their core business are literally just steady up into the right revenue earnings, all that sort of stuff. And part of that's driven by inorganic growth. But, you know, there's not a huge difference between inorganic growth.

If you're taking your cash flows on businesses for four or five times EBITA and just going and doing it yourself, like, it's not a huge difference if you can do it consistently. So, like, to me, a lot of people would say the downside is family doesn't care. They're just not going to do anything. It's like, okay, cool. then they'll do what they did for the past 15 years and shareholders, past 15 years, past 100 years, and shareholders will still be pretty happy there. Let me switch it up a little bit.

We've been going almost an hour, but not quite an hour. So I'll hold you to the hour timeline. You do this great weekly bulletin every week where you dive into, hey, here's some interesting event ideas. You've got the AOB, any other business where you just talk about something interesting. So we're talking on, what is today's date? It's June 28th. We're talking June 8th. We're talking June 28th, so you'll have another one coming out like Friday or something. But just wondering, what's on your mind these days in the markets? Yeah, I mean, I think, you know, there's a lot of concern around not of increasing talk around recession risk. And, you know, are we looking at a recession now?

Is it a stiflationary recession? One of the areas of the market that I think is interesting and kind of just in that kind of more. And I'm not a macro investor, but I like to kind of look at some of the kind of more macro. indicators at times just to kind of get a feel for, you know, just to try and frame, I suppose, where the market's at and how I should be thinking of it. I think, you know, I think the, you know, the high yield space at the moment is, you know, there are, you know, signs of, you know, potentially high yield, cracking, you know, leverage loans and high yield debt. I mean, that's collectively about over three and a half trillion dollars worth of debt outstanding, you know, 90% of

leverage loans now at the moment are Covenant light. You know, so, you know, there are no warning triggers now. And we're looking at, you know, we're just talking there about cost inflation and energy input cost increases. You know, you're looking at a, you know, wage inflation is going up, costs are going up, you know, interest rates are going up. So debt service obligations are going to go up. And you've got a lot of highly levered companies out there that are, you know, approaching that potential pinch point. And I know anecdotally already that there is liquidity is driving up, drying up in leverage loans and in the high yield space. You've got a whole three and a half trillion worth of triple B. That healthy chunk of that, you've got to think it could be lined up for

downgrade, which would, you know, lead to forced or mandated selling by a lot of the holders, which is going to impact spreads and, you know, credit risk perception again as well. So I think that's just interesting. I mean, how does that inform my view of equities because I'm an equity investor, equity analyst? So I'm kind of interested in in parts of the market that are, you know, maybe insulated from some of that wider credit risk and kind of some of the macro risk. And where that I, where I think some of that you can find some of that insulation is in special situations and in certain kind of commodity related names. It's funny. You see. say you can find that insulation in special situation, but I will tell you my my special

situation book that was put on in March would tell you that you do not find that insulation in the special situation's book because, you know, it's just interesting. Like special situation should be market neutral, but if it is a, you know, like, it's soul would be different. But if it is a company that has been rumored to be up for sale and you look at it and you say, oh, this company is trading for eight, comps go for 12. I'm going to buy because it's rumored to be put up for sale. I think it's good. I think they'll get a huge. premium. Like, when the market falls apart, spreads blow out, like, the stock sells off really hard because people quickly start looking at it saying there's no way they can finance this

deal. Now, the flip sides of that would be, if you're looking at something that's doing that right now, it could be really, really interesting, right? But I'm mainly laughing at myself because I don't want to cry on a podcast, if that makes sense. Yeah, well, I mean, you're right. I mean, in times of stress correlation is one. And, you know, if there's a liquidation event, there's a liquidation event, you know, that everything sells off. and you just got to be ready for that to take advantage of it. I mean, that, you know, March 20 was, you know, a brilliant time, March, April 20 was a brilliant time

to kind of pick up some bargains. So, you know, I think the way I'm thinking about things now is, you know, maybe preparing for potential, you know, sell-off. And, I mean, I think, you know, there are other situations there at the moment that I think you can, you know, where they can offer good risk-adjusted returns independent and maybe what the market is doing.

I mean, I think, you know, you look at what Buffett is doing recently. I mean, the two biggest, you know, the two most interesting, two of the biggest bets coming out of the recent Berkshire, you know, AGM was the Activision merger our play and his bets on energy. So, I mean, they're commodity in special sits. That's what, that's what Buffett is doing in the absence of everything, you know, in the absence of any other operational. So, I mean, I mean, to me, I think that's, that's a very interesting tale.

Commodities are interesting because I think I've put written about this, talks about it tangentially on the podcast and stuff, but, you know, I just keep looking at all these commodity companies and Buffett's buying oxy and I think Chevron is, he's buying that too. But if you just look at those, and you can apply this to a host of commodity companies, literally almost any energy and gas company, you know, this, the spot price for domestic US is $100. oil, $6.00 net gas, let's call it. Next year, it's $90 oil, $5.50 or $5, net gas, whatever. If you actually DCF all these companies out, they're basically implying the curve is $15 to $20 oil and $1 to $2 net gas below where the curve is implying. So I think what Buffett is seen and think what a lot of people are seeing is like, hey, the market is saying that the curve is flat out wrong in these prices. And if I buy them, like, I get a lot of cash flow up front because they're getting super normal profits right now.

So I'm basically betting on two things. The curve is close to right and management's not going to light all this money on fire. And it seems like a good bet to me. Like a lot of these guys, Chesapeake, Chesapeake is one I was looking at yesterday. I've done 30 minutes of work. So don't know how me to it. But like, CHK, they literally went to a conference and they said at current curves, we're going to do $13.5 billion in cash flow to equity over the next four to five years.

And their market cap is $12 billion. Right? So it's like, hey, forget about terminal value. All the terminal value is free. We're going to get all this. And they say we're going to return the vast, vast majority of its shareholders. Anyway, I'm rambling a little bit. I want to give you last thoughts.

Anything else on Seoul? Anything on the energy ran I just went on anything else you want to talk about. No, I think you're right. I mean, I also think kind of niche, certain niche commodities. I know you had a podcast recently on Alphamon, and that's it. That's a name I've written. I know you have, yep, written about as well. And I think, you know, that's a really good example of any.

I mean, that's a company in play. It's strategic metal. It's very niche. You know, it's, you know, and I think that there's that's the type of, that's another type of situation that I think is, is interesting in the current market and that you've got, you know, you've got a secular tailwind behind it. But it's also a special situation in the near term that kind of mitigates some of the other risks that might be, you know, they're in the near term.

Yeah, it does. Until, of course, I record the podcast. five days after I record the podcast, TIN's down 25% to the lowest it's been in like 18 months or something. But I still think that's interesting because as Brian mentioned on that podcast, even with TIN, it's at 27,000 right now. Like the share price probably implies something lower and these guys are structurally

advantage of TIN. But anyway, Connor, we've gone for an hour. It's been great having you, time number two. Looking forward to time number three. I'll just pitch you again. Look,

I was a literal moment one, number one subscriber to Connor's thing. If you are looking for value, special situations with, especially a European flair, I'd say. There's some American stuff, but especially European flair, I think it's, I think you do fantastic work. I think it's fantastic stuff and it's well worth checking out. So I'll include a link in the show notes if everyone wants to check it out. But Conno McGuire, thanks so much for coming on and looking forward to podcast number three. That's great.

Thanks, Andrew.