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Assessing Strategic Options for Independent Ethanol Plants

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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

Ø  Sell



Doing nothing, or trying to maintain the status quo, is just not an acceptable alternative.  The landscape is changing quickly with more sophisticated investors, primarily strategic investors, entering the industry aggressively.  Standing still creates vulnerability and instability for independent plants.  Generally speaking, strategics reinvest between 70-90% of Earnings Back into Business…it can be tough to keep up if you’re an independent plant.

Below is a brief review of some of the strategic options independent plants have as well as some of the implications around executing on these options.

Option 1: Reinvest & Retain

Objective – Continue to reinvest in both business & employees with an eye towards maximizing the value of the company.  The business must retain capital and have aligned shareholders to properly execute strategy

Considerations & Implications 

Ø  Balance Sheet is beginning to Work Against the Shareholders

ü  Accelerated Depreciation Rolling Off

ü  Tax Credits Gone

ü  Tax Burden Increasing…more difficult to shield earnings and shareholders will take on more tax liability

Ø  Initiatives are Capital Intensive to Execute but can create Long Term Value for Patient Shareholders and Employees

ü  Share buy backs – accretion opportunity for shareholders with extra cash on the books.  Could be a way to align shareholders going forward

ü  ESOPs – provides mechanism for employees to participate in the company and can help retain your employees

Ø  Risk Profile Increasing – Bets become Bigger for Independent Plant…Can’t afford to be Wrong

Option 2: Merge…or Some Offshoot of Merger

Ø  Objective – Align business with other like-minded business in order to gain synergies and diversify risk.  The company must work hard to define goals and clear path to execution

Considerations & Implications…Benefits & Burdens 

Ø  Benefits

ü  Gain Larger Footprint, More Clout and Negotiation Power

ü  Economies of Scale & Synergies– Reduction of Overhead, Logistic Opportunities, Spare Parts. R&D Efforts

ü  Ability to Leverage Balance Sheet – More Robust Balance Sheet

Ø  Burdens

ü  Cultural Alignment

ü  Loss of Some Employees, Board Members & Independence

ü  Difficult to Capture All of the Perceived Benefits of Merger

Ø  Other Ways to Accomplish the Bulk of the Benefits

ü  Benchmarking Platforms – Example: Ascendant’s Benchmarking Platform

ü  Group Purchasing Programs

Option 3: Sell

Ø  Objective – Look to Maximize Shareholder Value through a Sale.  The Company must run a tight sales process, drive competition and properly position the business to buyers to maximize value.

Considerations & Implications 

Ø  Pros of Selling

ü  Free up resources and capital to focus on other opportunities

ü  Eliminates internal shareholder debates regarding future plans for the business

ü  Exit today vs. deploying additional capital waiting (3-5 yrs.) for potential improved results on future projects

ü  Strong overall market valuations and continuing interest in ethanol market

Ø  Cons of Selling

ü  Forgo potential upside and EBITDA improvement

ü  Lose control of asset in one’s backyard

ü  Not guaranteed you will receive the value the shareholder’s desire in an exit

Ø  Improving Odds for Maximizing Value

ü  Ensure shared understanding and approach to valuation, expected range of values and minimum acceptable value early in the process

ü  Build the investment value around a clearly defined opportunity and competitive advantages

ü  Disclose issues or challenges early in the process – while still in best leveraged position and able to control the message

ü  Drive competition because it drives options and value

ü  Be prepared, transparent and responsive throughout the process

Being proactive is the best way to manage the risk and protect shareholder value no matter what path is taken.  An effective integration of a strategic and capital planning process is a critical first step that provides management the means to prioritize its strategic and business objectives in a proactive manner….whether looking to hold, sell, recapitalize, or merge. This integrated process protects the core business and puts plans in place to fund strategic business priorities at the defined cost and risk for your organization.  The company must tie its strategic intent with available capital to fully understand the implications to the shareholders and the business.  Following a more formal strategic and planning process improves understanding and alignment among decision makers regarding capital needs, financing options and implications for the business and shareholders.



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Guest Tuesday, 23 January 2018