|Shares Out. (in M):||45||P/E||0||0|
|Market Cap (in $M):||508||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
Boulevard Acquisition Corp (BLVD) is a platform acquisition company sponsored by Marc Lasry's Avenue Capital. Post the announced acquisition of AgroFresh from Dow Chemical two weeks ago, Boulevard is now a leader in post harvest specialty chemical solutions for growers, packers, shippers and importer/exporters in the fruit and vegetable space. In a unique structure to SPACs and Fortune 500 companies, Dow will retain a 40% interest in the company, the entire management team is staying in tact and Head of Dow M&A Tom MacPhee is leaving to run the business. The business has 56% ebitda margins, little working capital needs and spends only 1% of sales on capex. Furthermore, former AgroFresh management noted that despite being run as a cash cow within Dow their historical growth has been phenomenal, as evidenced by ebitda growth in most recent years at 38% and 23% in '13 and '14. This compares to the slide deck the company released on announcement of the deal which has ebitda growing 4% and 5% in '15 and '16. I believe this is management conservatism. If as little as 15% ebitda growth is achievable, as history would indicate, this equates to more than $109 and $126 million of ebitda in '15 and '16. With 45.4mm shares out, 17.2mm warrants (BLVDW) and 425mm of debt, at the current price of $11.19/shr investors are creating an interest in the company at a $933mm EV and 8.5x ev/'15 ebitda. While there is little information available on the company currently, I believe this presents an opportunity for enterprising investors.
AgroFresh views themselves as a data-driven sales company, providing post-harvest solutions to the vegetable and fruit space, allowing customers to better manage their produce, supply chains and ultimately reduce waste. AgroFresh's largest offering is SmartFresh, which delays the ripening of fruit and vegetables, while Harvista, the company's new pre-harvest product allows fruit to stay on the tree longer and grow larger before being picked. The company was founded in 1999 by Rohm and Haas based on the discovery of 1-MCP at NC State. With more than a decade of exclusive data and application experience, employees are experts in produce storage and supply-chain management involving the use of SmartFresh, a miracle technology. SmartFresh is used in climacteric fruit and vegetables to block ethylene receptors and thus pause the ripening process, allowing one to store produce with no change in taste or appearance. Climacteric produce include: apples, pears, bananas, avocados, flowers, broccoli, plums, mangos, cantalope, kiwis, tomatoes, etc. Here's how it works. SmartFresh is C4H6 - 4 carbon and 6 hydrogen molecules. Ethylene, which drives the ripening process, is C2H4 - 2 Carbon and 4 Hydrogen molecules. Both have a double carbon bond. That double carbon bond is the key that fits in the fruit's ethylene receptor site. The fruit is looking for C2H4 (ethylene). Then C4H6 (SmartFresh) comes along and the fruit likes it even more than ethylene. SmartFresh fits in the receptor site and blocks it. The beauty of the technology is SmartFresh doesn't stay at the binding site - it is broken down by the fruit’s natural process and biodegrades into simple molecules containing carbon, hydrogen, and oxygen. The carbon and hydrogen are like the carbon and hydrogen naturally present in the environment and the fruit, which is why there is no trace left behind. 24 hours later the carbon and hydrogen are gone, there is no residue, and the fruit is left with no more receptor sites. This process when combined with controlled atmosphere (lower oxygen / carbon dioxide levels and lower temperatures), can preserve produce for an unbelievably long period of time (apples in Washington state are stored using SmartFresh for more than a year with only one application). In ambient temperature, eventually new ethylene receptors are developed and ripening continues normally. The product is highly efficacious at extremely low dosages, and so volatile that it breaks apart within hours of it's use, leaving no residue. It is harmless to fruit, vegetables, humans, babies, water, fish and the environment. SmartFresh has over 400 registrations globally, including the Environmental Protection Agency (EPA), U.S. and the European Union.
Benefits of using SmartFresh:
Importantly, every type of produce has it's own optimal storage conditions dependent on its physiology, the variety in question, SmartFresh dosage, oxygen and carbon dioxide levels in controlled atmosphere or shipping container, stage in ripening process and temperature - this is where AgroFresh comes in. Using historical R&D and product knowledge the company advises customers on how to store and ship various types of produce and apply SmartFresh. AgroFresh technical people and salesforce answer questions such as- "I'm seeing a new rot or spot haven’t seen before. Can you help me identify this?," "I've got a new variety of pears. How much ethylene do these release and how would you suggest we apply SmartFresh," and "If we apply SmartFresh to this product at this stage of the ripening process what sort of result should we expect?" Fruits that work best are ones with a short window of harvesting. SmartFresh works great in tomatoes but tomatoes are harvested continuously throughout the year and there's no need for storage. Apples are harvested once per year and it works perfectly. While apples have historically been the company's main focus, I am told bananas and pears are a big part of the story going forward.
To get a sense for why the company historically focused on apples, one need not look past the unit economics in the apple business. It is the easiest SmartFresh sale across the produce spectrum. At the time the customer (grower, packhouse or importer/exporter) makes a SmartFresh buying decision, it is important to look at how much contribution margin is remaining in his produce relative to the cost of smartfresh. Let's take a 40lb box of 100 apples for example. At the time the buyer makes the SmartFresh application decision, they're looking at getting $20 for the box and need to put another $6 into them by time they can sell those apples. So the box of apples represents $14 of contribution margin. In the case of apples, one is often going to store those apples up to 13 months. At a SmartFresh cost of roughly half a penny per apple that’s 50 cents per box. So customers are spending $0.50 to protect $14 of apples. Customers told me they are not only protect their apples but making them better (crunchier, tastier apples) and the storage ability allows them to sell the apples throughout the year as opposed to all at once when they are harvested. In red delicious they saw a $2/box demand shift. In gala apples that demand shift was $5-6/box. The purchase decision here is a no brainer, while for other types of produce it can be more difficult. This is where future acquisitions could prove valuable. By acquiring other companies involved in the post-harvest fruit and vegetable space the company can more easily penetrate into other fruits and vegetables in which their products have efficacy. In speaking to former AgroFresh senior managment I was told the product works phenomenally in tomatoes, broccoli, avocadoes, cantalopes, plums, kiwifruit, pears, bananas etc. This was reiterated by employees in several US packhouses, though they noted they personally disliked putting SmartFresh in shipping boxes as it slowed down their line. They noted however they often have no choice as it is frequently requested by Walmart and other retailers.
Most of the company's growth in recent years has come from increased international penetration of SmartFresh, with substantial runway remaining in Europe at only 26% penetration in apples stored beyond 30 days vs the US at 88%. The variability in penetration rates is due to the pace of registrations- the product was first approved in Chile and the United States in 2002. In Europe their penetration is lower because products weren't approved until recently - 2009/2010. While Europe is a larger opportunity than the US it is also more fragmented and requires registrations on a country by country basis. Also, I am told SmartFresh recently was removed from a perceived bad list in Europe which should help sales. Interestingly, the company expects approval of organic designation in the US in 6-9 months. This will expand their opportunity set in higher priced produce. Additionally, the Head of sales for AgroFresh in Canada tells me they have targeted 3 new areas of focus - Broccoli, Avocado and one other opportunity which he was unable to disclose due to an NDA with their partner.
In addition to SmartFresh, the company has launched a new pre-harvest offering called Harvista- sales of which have been growing nicely (estimated '15 sales of $15mm). In speaking to one of the largest apple growers in the US I am told they love SmartFresh, and have started using Harvista as well. The grower said their own labor force is very good and well-managed, but for other growers who arn't in the same position, Harvista allows them to extend the picking season, reducing the amount of fruit that falls off the tree and goes bad. In addition, the fruit grows larger until it is picked. 60% of packhouses are also growers, so most of the time sales of Harvista will be to existing AgroFresh customers and sales contacts, providing the salesforce layup cross-selling opportunities with existing customers. Additional growth opportunities include RipeLock for use in bananas, AdvanStore and Ethylbloc for use in flowers. Continued penetration in international markets and produce categories along with the aforementioned opportunities offer interesting long term optionality.
While the company has yet to formally detail their capital allocation plans, I am told they are likely to focus on growing the platform by rolling up high quality competitors in the niche fruit and vegetable post-harvest space, enabling them to provide and bundle additional product offerings such as fungicides, soaps and waxes to existing customers, while also selling SmartFresh to new customers. While the company has the ability to raise prices, they are more interested in maintaining their excellent customer relationships and selling them additional products over time. Upcoming catalysts include the release of proxy materials detailing historical financials this coming Friday. The following week the company will go on the road to see investors until the end of May. Deal close is expected in mid to late July.
Release of proxy materials. Corporate roadshow. Deal close. Organic designation. Sell-side initiations. Beat/raise. Additional acquisitions.
|Subject||Dow's Motives and Questions|
|Entry||05/13/2015 07:43 AM|
One argument could be that Dow wants to participate in the upside that would come from potential roll-ups-and the SPAC sponsors already have something planned. Perhaps Dow recognized that the SPAC sponsors understand how to efficiently acquire assets using a publicly-traded stock as a currency. Therefore, owning 40% of a bigger company was going to be better than owning all of a smaller one. Or spinning it off and having it run by a management team that probably has operational competency but may not have as much experience or know-how with public market rollups was not going to be the most effective way to grow the business.
To turn your question around, if the implication is that the business is not actually that good or the growth is slowing-and therefore Dow was willing to sell at a discount-why retain 40% ownership at all?
1) Is the technology behind Agrofresh owned or licensed? Do you have sense of how the duration of the patent or moat preventing a generic competitor from entering the market?
2) What is the incremental investment required to grow the business in Europe? Could that be done through licensing the technology--or do they need a salesforce there?
3) The market share and EBITDA margins seems to indicate a dominant market position, at least for Apples in the US. Would this not give the business pricing power? Shouldn't this business be able to grow EBITDA at least 5% per year on constant unit volume through price increases alone? What are the substitute products that growers could turn to if they did not want to take the price increases?
4) Would the organic certification allow greater distribution in organic food retailers?
5) Does EBITDA vary by size of the Apple harvest per year-or is that not the right way to look at it
6) Why is there is such a large difference between depreciation/amortization and capital spending? I am assuming they are amortizing years of capitalized R&D or the finite-lived asset value of technology-but does that indicate money was spent inefficiently or that there is a duration to Agrofresh's useful life.
|Subject||Re: Re: Dow's Motives and Questions|
|Entry||05/14/2015 07:35 AM|
This is very helpful. Thank you.
|Subject||Re: Concerns on competition / patents|
|Entry||05/14/2015 08:28 PM|
ril-Thank you for this. Lets assume that everything that you said is correct-a few questions
1) why do you think Dow would retain a significant ownership?
2) Do you not put much weight on the argument that this is a heavily service oriented business-i.e. the relationships and registrations present a barrier to entry-thus even if new low-cost entrants come into the market-they will need to replicate the same level of service and reach to meet customer needs.
I share a lot of your concerns. But it is difficult to understand why these guys would do this deal if the product was facing relatively near-term competitive threats that would affect 40% of the business.
|Subject||Re: Re: Concerns on competition / patents|
|Entry||05/14/2015 09:50 PM|
1). I don't know but people make mistakes all the time. It's been a great biz for them historically. The obvious answer would be they think there are mitigants of some kind.
2). I am not convinced that there is an insurmountable service component here. Pace is also very competent in this regard for what it's worth. They already sell post harvest product to many of the same customers and are part of sumito chemical, so have a lot of muscle behind them. Customers we spoke to said they intend to trial the pace product and would be very open to switching if the product was 20-30 percent cheaper
Anyhow still doing work, but this issue has come again and again in conversations as a very real threat to them, but blvd and Chatham seemed dimsive so wanted to probe more.
|Subject||Re: Re: Re: Re: Re: Concerns on competition / patents|
|Entry||05/15/2015 08:51 AM|
ril136-Fair points. I agree that it is not good practice to invest based the work of another. My point was that your counterargument-which is a good one-seems fairly obvious. Therefore, BLVD/Management/Dow-would really need to be turning a blind eye to a large, looming problem. That is certainly a possibility-but I was inclined to give them the benefit of the doubt, at least initially. This did not seem to be a deal where the SPAC sponsors were getting such great economics-through founder shares or deep in-the-money options/warrants-that it was a heads-they-win; tails-they-don't lose situation.
Anyway-if you are right, it may be somewhat of a binary situation. Either they can maintain this favorable competitive position with their core product-or they can't. If they can't, there is a lot of risk here, even at the original purchase multiple. They need to have a logical and actionable plan to defend Agrofresh's business from visible threats.
|Subject||Re: Concerns on competition / patents|
|Entry||05/28/2015 11:46 PM|
"And at least in our conversations, we've heard mixed things from customers - some like Agrofresh a lot, but some say that they've acted like a monopoly for a long time and they are excited to be able to switch to a new product and would certaintly test anything that could save them money" - Would you mind sharing what size customers they are (maybe a revenue range)? The heart of what i'm getting to is wondering whether smaller customers have easier application issues and are less profitable and may tend to take a diy approach. Whereas all the big imporatant customers that can make this a platform company dont care. Were any of the people that mentioned a temptation to switch $5-10m customers? or 6-figure customers? thanks for any color and very much appreciate your shared insights.
|Subject||Re: Re: AGFS|
|Entry||10/31/2015 05:58 PM|
Chatham123, please forgive my ignorance. Why are you taking only WA apples as a total addressable market for PACE? Thx. Ares
|Entry||10/31/2015 09:57 PM|
Thank you, Chatham.