Optimum ventures - Bevo Agro - Take Private Proposal
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This is a preliminary round presentation deck for the UBC Finance Club Pacific Venture Capital Competition. It was created by Ben Cappellacci, Chris Fenn, Raena Kai and Scott Redwood.
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Optimum ventures - Bevo Agro - Take Private Proposal
- 1. Bevo Agro Take Private Proposal Optimum Ventures
- 2. Agenda 1. Business Overview 2. Industry Overview 3. Financial Performance 4. Value Drivers 5. Exit Strategy 6. Valuation 7. Risk Factors 8. Recommendation
- 3. Bevo Agro is a supplier of propagated plants to farmers and nurseries focused on high quality product offerings • Product Offering Sales Distribution • Greenhouse crop seedlings • Field food crop seedlings Canada • Bedding Plants and other flowers 53% 47% US Others • Business Model Security Information • Fulfillment based sales contracts Ticker TSX-V: BVO • Flexible product specs based on needs Sector Agriculture • Markets to established growers, farms and Ornamental nursery products, nurseries Industry Vegetables and melons Market Cap. 3.58M
- 4. Plant propagation market has increasing economies of scale with downward pressure on prices Shares Market LTM Tangible Total Day Close Outstanding Capitalization LTM Net Book Enterprise Company Name Price Latest Latest Latest Debt Value/Share Value PRT Growing Services Ltd. (TSX:PRT) 3.3 9.76 32.2 -3.3 4.15 28.88 S&W Seed Company (NasdaqCM:SANW) 5.86 5.8 33.99 -6.8 2.58 27.2 Village Farms International, Inc. (TSX:VFF) 1.32 38.71 51.09 55.1 1.03 108.41 Bevo Agro Inc. (TSXV:BVO) 0.14 25.54 3.58 21.7 0.5 24.77 1400 Key Producers (by Acres) in Canada and US 318 232 175 95 34 Bevo Agro is a price taker in this competitive industry where decreasing volume growth and high capital costs are driving consolidation as major international players control the lion’s share of the market
- 5. High sales volatility, poor ROA, and significant debt burden have resulted in -2.6% CAGR for past 3 years 25 0.15 4% 20 0.1 3% 0.05 15 2% 0 Return 1% 10 Revenue -0.05 on 0% 5 -0.1 Assets -1% 2007A 2008A 2009A 2010A 2011A - -0.15 2007 2008 2009 2010 2011 -2% Other United States -3% Canada Growth 25 70% 20% Millions 60% 20 15% 50% 15 40% 10% 10 30% EBITDA 5% Leverage 20% 5 margin 0% 10% 2007A 2008A 2009A 2010A 2011A 2012F 2013F 2014F 2015F 2016F 0 0% -5% 2007A 2009A 2011A 2013F 2015F EBITDA Margin EBIT Margin Net Income Margin
- 6. Restructuring management, increasing sales, and restructuring debt will drive investor value Management Sales force Financial engineering Jack Benne, CEO 25 15% 25 70% 10% 60% 20 20 •Strong horticulture 50% 5% capabilities 15 15 40% 0% •Poor strategic leadership in 10 10 30% -5% expanding company growth 20% 5 -10% 5 10% •Poor ability to drive sales 0 0% - -15% Replace CEO with 2007 2009 2011 2013 2015 2007A 2009A 2011A 2013F 2015F external leadership Other United States Debt Debt / Assets Canada Growth Leo Benne, VP and GM •Hire VP Marketing to build organization • Refinance organization to reduce debt brand, develop sales strategy, and manage load and interest payments •Strong general sales force •Reduce debt load to increase management capabilities •Hire 3 sales staff to secure contracts organization attractiveness to acquiring •Historically effective COGS company management •Focus sales efforts on: •higher margin products •40% target gearing •longer term contracts Maintain as •larger customers General Manager •Less price-sensitive nurseries
- 7. Exit investment in 5 years through company acquisition Target buyer Exit expectation Return sensitivity Gordon growth •Exit valuation driven heavily by time to Expect to sell Bevo Agro to a large sale exit; 5 year exit horizon is critical to Agricultural conglomerate strong return interested in expanding their • Terminal growth rate: 2% seedling portfolio • Exit value: 6.08M •Low sensitivity to large changes in exit • Strong IP and technology value provides significant buffer to capacity creates attractive revenue and debt projections opportunity for large Agro- Exit multiple business Change in exit value • De-leveraging will reduce risk • EV/EBITDA: 2.8X (2016) Time to for buyer • Exit value: 5.61M exit -30% -20% -10% 0% 10% 20% 30% • Industry trend towards 3 Years -25% -20% -15% -25% -4% 1% 6% Average exit consolidation increases 4 Years -17% -11% -5% -17% 8% 14% 20% valuation opportunity for competitive 5 Years 23% 31% 40% 48% 57% 65% 74% exit value offers • Exit value: 5.85M 6Years 0% 21% 31% 11% 51% 61% 71% Five year investment horizon maximizes expected return
- 8. Offer for Bevo Agro is $0.21 a share indicating a $5,362,560 valuation with a 50% premium APV (+- 20% in exit) APV (+/- 15% in sales) 2011 BV/Share Min Point 2011 EV/EBITDA Average 2011 EV/Revenue Max Presedent Transactions Expected Return $- $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $1.40 $1.60 $1.80 $2.00 Current Share Price: $0.14 Per Share Price 48% APV - $0.29 EV/EBITDA - $0.36 Precedent - $1.00 Bid Range: $0.21 - $0.31 per share -
- 9. Using key mitigations, Bevo Agro risk will be hedged against Risks Mitigations Competitors may find better, more efficient ways of Increasing R+D operating and producing crops Cash flows decreasing - may prove difficult for Bevo Agro Debt refinanced; current, ineffective management team to meet interest obligations, could face bankruptcy replaced; new sales team/strategy hired/implemented ($550,000 increase in Year One) New sales team will work to secure long term contracts at Product prices are variable, market driven fixed price Alternative growth/consolidations strategies can be Five year exit goal may prove unobtainable pursued Very capital intensive business; growth is expensive Contracts secured before growth pursued
- 10. Recommendation: Tender offer of $0.21/share Amount of Investment Price (Per Share) $0.21 Per Share Premium $50% Per Share Valuation of the Company Price Per Share $0.31 Capitalization of the Company 25,536,000 Pre-Money Valuation $5.36 MM Post-Money Value $7.94 MM Estimated Exit Value $10.1 MM Investment Horizon: 5 years Expected Return: 48%
Notas del editor
- Good afternoon gentlemen, thank you for joining us. We are here today to discuss a potential acquisition of Bevo Agro, a publicly owned company operating here in BC in the agriculture sector. In our opinion, the organization is currently undervalued, and based on our projections, this acquisition has the potential to generate strong return with relatively little management from our side. Lets begin.
- We are going to be explaining our recommendation on a take private proposal for Bevo Agro by introducing our research on the company’s current operations, market position as well as past financial performance.Within our proposal we have set a investment horizon as well as key changes to value drivers in order to achieve the desired return of our recommendation.
- Bevo Agro is focused on offering high quality products in the nursery products and vegetables and melons industry. The asset heavy company has 34 hectares of greenhouses where it has focused its product on seedlings for greenhouse crops like hothouse tomatoes, field food crops like strawberries and bedding plants for gardening projects. BevoAgro’s main customers are nurseries and farmers though recently it has experimented in growing consumer ready cucumbers, tomatoes and a recent partnership with the University of British Columbia will see it try to develop a market for Pawpaws. Bevo Agro is currently listed on the TSX venture and has a market cap of 3.58 Million. It’s business model is focused around fulfillment of contract based sales which leads it to high revenue volatility, yet the capacity and expertise at BevoAgro’s facilities allows it to propagate nearly any vegetable.
- The market for plant propagation is one that is deep within the value chain of the consumer facing vegetable industry and plant nurseries. Bevo Agro is a price taker in the market as the companies it supplies are ultimately seeking to buy propagated plants at the lowest cost but it’s emphasis on quality gives it a competitive edge. Because propagation requires greenhouses and sophisticated equipment, new entrants to the market are rare and recent declines in sales of vegetables coupled with price increases means there is a long term trend toward consolidation. When we look at comparable companies in Canada and the United States we see that BevoAgro’s facility size is among the smallest in the industry and larger players take advantage of increased economies of scale to better compete for sales contracts. The contract nature of the sales contributes to high revenue volitility. When we look at share price BevoAgro’s market Capitalization is fractional compared to it’s competitors, it’s total enterprise value being similar to companies that have nearly ten times the market capitalization.
- Bevo stock is currently trading at a discount to its intrinsic value due to the volatility of its sales and large interest payments. Over the past three years, Bevo’s sales have decreased at a compound annual growth rate of -2.6%. While demand has increased in the industry, Bevo has lost market share due to its weak sales force. Revenue is segmented geographically, with annual growth rates ranging from -10% to 10%.Bevo’s return on assets is extremely low. This is due to weak sales and an underutilization of its PP&E. We believe that Bevo is experiencing low returns on these assets because it is not reaching its capacity. During the due diligence process of this acquisition, we will verify that the assets have the potential to handle high sales growth without substantial capital investment.Bevo is over leveraged relative to its cash flows. While a 60% debt to asset gearing may be acceptable in the industry, it is too high for Bevo as its debt is currently ten times as large as its EBITDA. We believe we should refinancing Bevo’s debt to reduce bankruptcy risk and increase free cash flows.Bevo’s EBITDA margin is higher than the industry average. However, its EBIT and net income margin falls below the industry mean. We believe this is due to the large amount of operational leverage Bevo has build up through fixed asset purchases. We expect these margins to improve as Bevo’s assets perform closer to capacity.
- There are three critical ways to increase the value of a company; enhancing operational efficiency through mechanisms such as economies of scale, increase sales through activities like marketing and innovation, and changing the capital structure to provide better manage the money you have. Bevo Agro has the opportunity to fundamental change the business through each of these. First, it is critical to change the management of the organization. The current CEO, Jack Benne, is a very capable horticulture expert. That said, he has been an ineffective leader and incapable of driving real positive profits for shareholders. The company has continued to be managed as a family business because of the large stake that the Benne family owns, however this has not benefited the public shareholders of the organization. To effectively change the organization a CEO external to the organization must be brought in. Leo Benne has, however, supported the organization achieve stronger COGS than its competitors, and provided his interested, we would intend to keep him as GM. A critical shift in sales efforts needs to be achieved. The current organization business does not engage in an effective sales force strategy, resulting in poor utilization of its assets and in return, poor profit. Hiring a VP marketing to focus on re-branding the business, developing an effective sales strategy, and managing a small sales team will allow Bevo Agro to assume an active role; promoting its exceptional products and focusing on higher margin sales, seeking larger customers, and securing longer-term contracts. Finally, it is critical to address BevoAgros' significant debt issue. By de-leveraging the organizations debt, we will be able to decrease interst payments and increase the attractiveness of the business for potential buyers.Together, these activities will drive significant value and increase the exit valuation.
- We expect to exit this investment after five years in 2016. We expect to exit this investment through a sale to a large agricultural conglomerate interested in expanding its seedling portfolio. It is likely that we will be able to find a buyer as there is an industry trend towards consolidation, which will increase the competition between buyers and increase the exit valuation. Strong intellectual property, patents, and technology capacity will make Bevo an attractive acquisition. Through deleveraging of the company, we will reduce risk for the buyer.We estimate an exit value of $5.85 million in 2016. This exit value is the average of two valuation methods. Using the Gordon growth method, we estimated an exit value of $6.08 million. We used a terminal growth rate of 2% and a discount rate of 40%. We also used an EV/EBITDA exit multiple of 2.8x to estimate the sale offer. This multiple is based off of precedent transactions.Due to the high uncertainty in forecasting an exit, we performed a sensitivity analysis the timing of the exit as well as its value. We found that returns are maximized with an exit in five years. In addition, we found that return is highly sensitive to changes in what the company will sell for. To account for this risk, we require a return of no less than 40%.Based on these assumptions, the discounted cash flow analysis predicts a return of 48%.
- To value Bevo, we used three valuation methods: APV, current market comparables, and precedent transactions. We used the APV method in our discounted cash flow analysis to account for the decreasing leverage of the company. This method values Bevo at $0.29 a share. Key assumptions in this model include the revenue forecast and cost of debt. We forecasted revenue by geographic segment. The cost of debt is based on the current weighted average cost of debt from Farm Credit Canada. Our sensitivity analysis on the APV valuation includes a 40% range in exit value, as well as a 15% range in sales.Our criteria for selecting appropriate market comparables were similar industry, geographic location, and market capitalization. We analyzed EV/Revenue, EV/EBITDA, and Book Value/Share. For our valuation, we selected EV/EBITDA as it accounts for operating and capital structure. This metric gave us a share price of $0.36.The final valuation we used wad precedent transactions. We found that the range of values given from this method had high volatility. Will it is helpful to see what companies will pay for a company; we felt that this metric did not provide much help to our valuation as it predicted a share price of $1.00.We used a weighted average of these three methods with the following weights: 70% APV, 25% EV/EBITDA multiple, and 5% precedent transactions. The resulting valuation was $0.31 per share. We feel that management will require a premium greater than average because they are founders with emotional ties to the company. However, they are aging (60+) and may be looking to exit. With a 50% premium, we feel an adequate offer of $0.21 per share would be accepted. This will allow for a 48% return on our investment.Our bid range in $0.21 - $0.31 per share for a 40% return.
- As you can see from the text there are a number of risks associated with this company. We feel that our mitigation strategies will successfully combat these risks. By increasing the funding towards research and development we will ensure the company meets or exceeds the industry standard. In order to ensure the company remains solvent we will refinance their debt, replace its current, unsuccessful management, and bring on a sales team to implement a new sales strategy. This will help to stop the decline of cash flows and boost our revenue. This will also help to ensure that the company is protected from any changes in the prices of their products as the sales team will seek long term, fixed price contracts. We have a five year exit strategy with a 40% ROI for our investors. If after that time we fail to sell to a strategic buyer we have a number of alternative strategies we can follow such as taking the company public again or reinvesting and growing the company through M&A. That said, we are conservative owners and will bring on a management team that implements our conservative beliefs. As our company grows in size, capital will be reinvested to expand the company’s facilities and pay down debt. We will not expand the facilities until we are sure they will have no trouble selling the additional supply.
- In order to successfully complete this acquisition we are going to have to work closely with management as they hold a 60% stake in the company. We plan on offering them a 50% premium to the current share price. Should management not agree with our offer, our other avenue is to negotiate with the bank to buy their debt, possibly at a discount. BevoAgro’s declining cash flows coupled with the potentially small market for BevoAgro’s greenhouse assets may make this offer intriguing to the bank.