UPDATE: March 8, 2021: International Flavors & Fragrances is offering Sachem Head Managing Partner Scott Ferguson a seat on its board later this year. The position being offered to Ferguson would expand the ingredient company's board from 13 to 14 directors. “This agreement reflects our commitment to continued shareholder engagement and long-term value creation as well as to ensuring we achieve the substantial cost and revenue synergies that we have identified in connection with the N&B transaction,” IFF Chairman and CEO Andreas Fibig said in a written statement.
- Activist investor Sachem Head Capital Management reportedly has bought about a $1 billion stake in International Flavors & Fragrances, Reuters reported. Records of the purchase have not yet been filed with the U.S. Securities and Exchanges Commission.
- Unnamed sources close to the matter told Reuters that Sachem Head, owned by hedge fund veteran Scott Ferguson, wants to force IFF to improve its financial performance and smoothly integrate the former DuPont Nutrition & Biosciences unit, which merged into IFF earlier this month.
- It's already been a big year for IFF, with the recently completed merger. The transaction was worth an estimated $26.2 billion and gives IFF a leading position in many categories of trendy and better-for-you ingredients.
While IFF's share price surged when the DuPont merger closed on Feb. 1, the presumed entry of Sachem Head and the corresponding stock price gains since show at least some investors think IFF could use a hand in the integration.
While IFF has been a serial acquirer, its last big purchase — Israel's Frutarom, which it bought for $7.1 billion in 2018 — caused some problems. IFF discoved in 2019 that two of the company's operations in Russia and Ukraine may have paid bribes to customs officials and given kickbacks to distributors. Several customers of former Frutarom subsidiaries took their business elsewhere. IFF is currently battling a federal class action suit with investors about the deal.
Considering the long and relatively public vetting of the recent merger, the DuPont acquisition is unlikely to cause the same kinds of problems. But it does make IFF a behemoth in the industry and there are certain to be some integration and business challenges as things come together. Research firm Gordon Haskett has periodically mentioned IFF might be a good target for an activist investor, Reuters reported. Prior to the merger, its shares lagged behind other competitors in the ingredients space.
Sachem Head is a relatively small firm, but it's known for wielding big influence. Forbes put the firm in its "king of the activists" ranking last spring. The firm made a splash in the food sector in January 2018 by using its stake in U.K. hotel and beverage company Whitbread to encourage a sale of its Costa Coffee division. In August of that year, Coca-Cola bought the coffee company for $5.1 billion. According to Reuters, in 2020 Sachem Head gained 45.6%, nearly tripling that of the Standard & Poor’s 500 stock index.
Most of Sachem Head's other investments are in areas of outside of food and ingredients, but there are some common themes. The firm recently increased its stake in Elanco Animal Health, and Ferguson joined that company's board. According to CNBC, Sachem Head took this position following a $6.9 billion acquisition Elanco made during the pandemic. Elanco also had supply chain issues, low operating margins and an EBITDA margin much lower than its targets.
IFF reported its quarterly earnings on Wednesday night, the same day the Sachem Head stake was reported. In a call with investors on Thursday morning, IFF CEO Andreas Fibig did not directly address it. In response to a question about some of the things IFF had done that could have attracted an activist investor, he said the company has had a strategy to effectively respond to the market, and its growth — from below $3 billion in sales in 2014 to $11 billion now — can attest to the soundness of that strategy.
As IFF begins to integrate DuPont's division, there are many aspects of the way the business is run in flux. It could be a prime time for an activist investor to really make a difference without shaking too much up. Sachem Head is known for increasing profits in these situations, making a difference in the firm's own bottom line, but also boosting companies' EBIDTA. If the reports of Sachem Head's stake are correct, it could be better for all parties in the long run — though it adds something else the newly merged company needs to figure out.