Find the Levers That Create Value in Your Ethanol Business
Like investors in any business, investors in ethanol plants seek a return on their investment. Whether returns take the form of short term dividends or long term capital gains, the ability to deliver returns to shareholders is based on the ability of the business to drive cash flows to shareholders over time. Since the value of your business is based on your ability to drive cash flow, it is important to understand the levers that generate cash flow in your business as well as how you might improve that potential going forward.
Many independent ethanol plants are at a crossroads regarding how to continue to maximize value for their shareholders while staying relevant in the marketplace. Several options exist and all have significant implications regarding liquidity, distributions & shareholder alignment.
Ø Reinvest & Retain Capital
Ø Merge or Some Offshoot of a Merger
The market for food industry transactions has improved significantly since the financial crisis in 2008-2009. As seen below the number of deals has increased significantly since the downturn. EBITDA multiples are very strong for processing companies, averaging over 9.4x in 2013. These high purchase price multiples would not have been possible without the wide availability of liquidity and higher leverage being provided by banks and other lenders (total debt of 3-5 times EBITDA depending on the transaction).
While most successful ethanol producers conduct strategic planning exercises to lay out the future priorities for the business, comparatively few effectively tie in a formal capital planning process to ensure the appropriate capital strategy and structure are in place to support the achievement of the defined strategic priorities.
A common misconception regarding the measurement of business and shareholder value is that it only matters when considering the sale of the organization. Shouldn’t the value of the business to shareholders as well as the factors that most affect it be important considerations in any strategic or financial planning discussion? With a shared understanding of the value of the organization and the drivers behind that value, the company is much better positioned to determine how best to protect and enhance that value going forward. Not all gallons are created equal--know how your plant creates value!
NEDAK Ethanol LLC was conceived in 2006 by a group of local investors and farmers in order to build a 44 million gallon ethanol plant in Atkinson, Nebraska. The company was initially well capitalized, having successfully raised $47.94 million of public equity, $42.5 million of senior debt and $6.86 million in tax increment financing. NEDAK encountered construction problems and delays that led to the plant starting production during difficult industry conditions and low margins. As a result, throughout 2010 and 2011 NEDAK operated with limited liquidity and tight profitability and was unable to take advantage of industry opportunities.
It became clear that in order to be a long-term survivor in the ethanol industry NEDAK needed to restructure its debt and bring in new capital. Ascendant Partners was hired to facilitate this process. The foundation for success in a distressed restructuring situation such as this is laid through a collaborative and disciplined planning process designed to reposition the company prior to re-entering the capital markets. Upfront planning and analysis are keys to success in a complex financial restructuring. In this case the planning and analysis steps included:
• Working with all constituents (senior lenders, subordinated lenders, board members, shareholders, other stakeholders) to ensure a clear understanding of their goals and objectives as well as concerns and how they fit with the company’s current and future situation
• Conducting comprehensive industry and competitive analysis, including benchmarking performance versus other ethanol plants
• Identifying strengths of the company and how to build on those strengths
• Identifying the weaknesses and how to best mitigate them
• Preparing a plan to re-position the company to secure an optimal capital structure given the circumstances
• Ensuring a competitive process to soliciting and selecting investor candidates that are best matched to the company’s unique investment opportunities
• Continually working with all stakeholders to keep everyone on the same page and working together to complete the recapitalization
A distressed restructuring will present many difficult challenges along the way, too often which result in failure. Detailed preparation, effective participant alignment and execution of the plan prior to and during the process are important factors in protecting shareholder value and rectifying lender concerns. NEDAK’s commitment to following these steps, with Ascendant’s assistance, allowed it to successfully restructure its senior debt, obtain new capital from both existing and new investors, and enter into an asset management agreement designed to better manage its working capital -- all key components for positioning the company for long-term success.
The fundamental problem is a combination of ethanol production being up at the same time motor gasoline demand is down and ethanol production hitting the blend wall of 10%. Average annual gasoline demand is down over 10% from the peak in July of 2007. The Energy Information Administration projects gasoline demand to be down another 0.34% in 2012 and down slightly in 2013.
January 6, 2012
Western Wisconsin Energy, LLC (Western Wisconsin) was conceived by local farmers, local investors and LLC partners. The company’s vision was to build a best-in-class Fagen/ICM ethanol production facility with a strategic location and world-class infrastructure, design, construction and implementation. Like many independent ethanol plants, it was Western Wisconsin’s goal to build an ethanol plant that met the needs of members/investors and the community, strengthened the regional economy by creating new jobs and added to the tax base.
The economic recovery has breathed some life back into the M&A markets, which is expected to continue into 2011 and beyond. The majority of middle-market business executives (69%) expect increasing M&A activity in the next 12-18 months, driven largely by economic recovery, improved capital markets and building cash levels. Cash rich strategic buyers, private equity groups (PEGs) and consolidating markets will combine to create powerful forces behind recovering deal flow in the coming years, as will continued opportunities related to distressed industries.