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Quaker / $KWR is currently our highest conviction short, bringing together: imminent catalysts, deteriorating macro, extreme over-valuation (obscured in B’berg + others). Details:
1/ Despite quickly rising risks on multiple fronts – macro, M&A execution, bal. sheet – KWR shares trade at ~50% EBITDA mult premium vs. historical avg. (15x vs. 10x).
2/ Bloomberg + others incorrectly show valuation as in-line w/historic avg (10x) due to pending acq’n of Houghton – and mismatch between PF EBITDA est’s + standalone cap structure.
3/ To illustrate, red line below shows EV/EBITDA using databases (Sentieo here – but others are similar), while blue line corrects (our est.) for pro forma cap structure. 
4/ Quaker is expected to close on Houghton in the next month or so (doubling size of co). In our view, this will kick off a series of potential downside catalysts:
5a/ First, it seems very likely interim performance for Houghton will disappoint – and that post-close KWR will experience a deceleration in already-modest growth / share gains.
5b/ Incredibly, the most recent financials we have from Houghton are from…2016. Mgmt has repeatedly declined to provide actual updated financials.
5c/ Questionable disclosure, combined w/deteriorating autos (Houghton has big exposure), leads us to believe #’s have gotten worse (despite vague proclamations abt. being in-line w/mgmt. expectations).
5d/ While we assume KWR may up synergy targets – we don’t think it’ll be material to the big picture (already targeting close to 20% of combined EBITDA in synergies).
6/ Second, the valuation picture should become *crystal clear* post-close, as databases begin to use the right cap structure.
7/ Third, Houghton’s PE backer (since 2012) will own 25% of KWR shares post-close. This should be a big overhang – *especially* in light of valuation + modest share liquidity.
8/ Adding further juice is deteriorating macro backdrop combined with freshly-levered bal. sheet (3x – first time really levered in recent history).
9/ As an ex.: just last week ArcelorMittal (major customer) announced cuts to euro steel production due to market weakness. How is global auto doing today?
10/ Levered balance sheet greatly reduces margin for error -- in terms of both macro *and* integrating by far largest acquisition in KWR history
11/ Lastly, we note insiders have been aggressive sellers of shares following the initial pop on deal announcement – and leading up to closing.
12/ While short int. has definitely ticked up of late, it still stands at just ~4% – when adjusted for significant pending new issuance of shares.
End/ No, we are certainly not the first pitch this idea – but, we believe timing is very right…today. Thanks for reading – as always, please do your own homework.
