UPDATE: March 8, 2021: International Flavors & Fragrances (IFF) is set to offer Scott Ferguson, Managing Partner of Sachem Head, a position on its board later this year. This addition would increase the board size from 13 to 14 directors. IFF Chairman and CEO Andreas Fibig stated in a written statement, “This agreement demonstrates our commitment to ongoing shareholder engagement and long-term value creation, as well as to realizing the significant cost and revenue synergies identified with the N&B transaction.”
Although IFF’s stock price soared following the completion of the DuPont merger on February 1, the anticipated involvement of Sachem Head and the subsequent rise in stock prices suggest that some investors believe IFF may benefit from assistance during the integration process. Historically, IFF has been an active acquirer; however, its last major acquisition of Israel’s Frutarom for $7.1 billion in 2018 presented challenges. In 2019, IFF uncovered that two of Frutarom’s operations in Russia and Ukraine may have engaged in bribery and provided kickbacks to distributors, leading to several customers of former Frutarom subsidiaries taking their business elsewhere. IFF is currently facing a federal class action lawsuit from investors related to this deal.
Given the extensive and relatively public scrutiny of the recent merger, the DuPont acquisition is less likely to encounter similar issues. Nonetheless, this merger positions IFF as a giant within the industry, and it will undoubtedly face integration and operational challenges as it consolidates its business. Research firm Gordon Haskett has suggested that IFF could be a suitable target for an activist investor, particularly as its shares had underperformed compared to other competitors in the ingredients sector prior to the merger.
Sachem Head, though a smaller firm, is recognized for its significant influence. Forbes ranked the firm among the “kings of activists” last spring. The firm gained attention in January 2018 by leveraging its stake in U.K. hotel and beverage company Whitbread to advocate for the sale of its Costa Coffee division, which Coca-Cola subsequently acquired for $5.1 billion in August of that year. In 2020, Sachem Head achieved a remarkable 45.6% return, nearly tripling the performance of the Standard & Poor’s 500 stock index.
While most of Sachem Head’s investments lie outside the food and ingredients sectors, there are common threads. Recently, the firm increased its stake in Elanco Animal Health, where Ferguson joined the board following Elanco’s $6.9 billion acquisition made during the pandemic. Elanco has faced supply chain issues, low operating margins, and an EBITDA margin significantly below its targets.
On the same day that Sachem Head’s stake was announced, IFF reported its quarterly earnings. During a call with investors, CEO Andreas Fibig did not specifically address the new stakeholder. However, when asked about actions that might attract an activist investor, he emphasized IFF’s strategy to effectively respond to market conditions, pointing to its sales growth from under $3 billion in 2014 to $11 billion now as evidence of the strategy’s effectiveness.
As IFF embarks on integrating DuPont’s division, many aspects of its operations are currently in flux. This presents an opportune moment for an activist investor to effect meaningful change without causing significant disruption. Sachem Head has a reputation for enhancing profitability in such scenarios, which could improve both its own bottom line and the EBITDA of the companies it engages with. If reports regarding Sachem Head’s stake are accurate, this could ultimately benefit all involved parties in the long run, although it adds another layer for the newly merged company to navigate.
In this context, the synergy between IFF and potential investments in products like calcium citrate and cholecalciferol could provide additional growth avenues, aligning with the company’s focus on long-term value creation.