Entrepreneurial Finance - Fred Huibers

Entrepreneurial Financeby Fred Huibers

• Introduction• Equity raising and venture capital• Strategy• Corporate restructuring• Optimization of capital structure• Your Financial Issue• Course ‘Entrepreneurial Finance’• Key Learnings & Survey

Agenda

• Slides• Video• Chat• Moderators• Tickertape• Polls

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-- POLL --

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TITELSLIDE LECTURE

Entrepreneurial Finance

Equity raising and venture capital

Activity & Geo Split 2001 CountriesNetherlands 30%Spain 21%UK 7%Norway 6%Belgium 6%US 7%Chile 3%ROW 20%

AquacultureFish feed 18%Salmon breeding 15%

AgricultureCompound feed 22%Premix 10%Poultry 20%Pork 13%Breeding 2%

Financials

a) Falling market shareb) Operational cost are surgingc) Uncompensated capital intensityd) Research and development productivity

-- POLL --

What issue does Nutreco have?

Venture Capital and IPO• 1887 Origin Twijnstra agri trading• 1975 BP Nutrition agri and aqua• 1994 Nutreco MBO with Baring Capital Partners and Cinven

• USD 425 million• Extreme leverage and consolidation• Independence and sense of purpose

• 1997 IPO exit net income € 90.0 M

Share price evolution

Jan-01 Apr-01 Jul-01 Nov-01 Jan-02 Apr-02 Jul-02

Source : Bloomberg 12 December 2002

Half-year results

in line with lower

expectations

Interim stock dividend

valued at 1 for 81 shares

Nutreco announces

exceptionally good

2000 results

Nutreco lowers profit forecast due to very low

salmon prices

Nutreco announces weak 1H

and expects to recover

2H

Strategy

Nutreco - Portfolio Analysis

Aquaculture business combines high growth and high margins. However margins in the farming business are under

pressure due to declining salmon prices.


Compound feed combines low growth and poor margins (bulk business). Premixes can be seen as

the company’s cash cow.


Vertically integrated activities do not have higher margins than premixes or fish feed


Nutreco is wordwide the number one in Aquaculture and Premixes and has strong regional positons in Compound Feed

Value chain

Compound feed,Premixes and Specialitiesfrom poultry, pork, ruminants and fish

Compound feed andPremixesfrom poultry, pork andfish

Pet food

Food service industry

Retailers

Consumer

Nutreco

Provimi

Fish breeding

Poultry and pork breeding

Fish processingFish farming

Poultry and pork processing

Food service industry

Farmer purchases feed from Nutreco

Nutreco activities

Provimi activities

Poultry and pork farming

Retailers

Consumer

Fish breeding

Poultry, pork and ruminants breeding

Fish processingFish farming


Farmer purchases feed from Provimi


Nutreco has opted for a vertically integrated approach and is also active in breeding, fish farming and processing

Provimi has opted for a non-integrated approach (no risk or exposure from animals)

Strategic change• A reduction of the exposure to salmon farming

would - Reduce volatility of results- Increase pricing power- Improve return on capital employed as average

margins and capital turnover improve• This would like to give significant benefits in

terms of shareholder value and a lower Weighted Average Cost of Capital

Rebalancing for Growth• Rebalancing

- Invested capital in feed from 1/3 to 2/3- Focus on high margin fish feed and premix

• Growth- Expansion of higher growth emerging

markets- Acquisitions to accelerate transition

Corporate restructuring

Reduce salmon farming • Market dynamics in fish farming in Europe

(especially Norway) require a structural solution to overcapacity

• Mover needed as dominant player unlikely to move due to

- high leverage and/or- government involvement

• Consolidator needs to be largest player and accepted in Norwegian environment

a) Sell the operation by way of public auctionb) Sell the operation by way of trade sale to a

competitorc) Split Nutreco two entities salmon farming and

the restd) Set up a joint venture

-- POLL --What method do you recommend to reduce exposure to salmon farming?

• Largest operator and Norwegian identity:- A joint venture with a Norwegian player

• Exit at current salmon price unacceptable- Delayed exit with a clear time table

Reduce salmon farming

Joint venture

Pro’s • Business combination will result in

superior market positions and enhanced leverage on larger customers

• Enables Nutreco to benefit from upside potential in salmon farming

• Critical mass can be achieved enabling stock market exit over time

Cons• Number of sizeable partners is limited• Financial position of some of the

potential partners is weak• Integration of new structure in Nutreco:

feed supply and production agreements have to be renegotiated

• Potential anti-trust issues?• Potential lack of management control?

If the right partner can be identified, a well-structured JV seems to offer the best opportunity for Nutreco’s salmon farming business going forward

Process Nutreco identifies strategic partners, and initiates discussions to form a combination. JV will be structured to combine activities and capital structures of Nutreco and the selected partner.

Equity carve out: pro’s & con’s Pros • Ability of subsidiary to

operate as independent public company

• Places shares in the hands of long term investor base

• Ability to sell partial stake• Proceeds• Structure well understood

by investors

Cons• Must be viable new issue

market for subsidiary• Size of subsidiary• Existing investors may not

be given opportunity to participate in upward potential of the shares

a) Exisiting investors may not benefit from upward potential

b) Loss of market sharec) Lack of proceeds for Nutrecod) Structuring cost

-- POLL --What is the main drawback of a carve

out (compared to a spin off) for Nutreco?

Marine Harvest JV• 13/09/2004 JV with Stolt Sea Farm: with 22% market share global market leader

• 29/04/2005 Unanimous shareholder approval

• 23/11/2005 Publication time table for IPO in 2006

• March 2006 John Fredriksen ($ 11 billion net worth) buys for € 881 million

Scale: •Scope for margin enhancement through synergies of scale•product placing with speciality and retail chains

Business mix:•Expansion into premium products•Reduced exposure to negative price fluctuation in livestock

Geographic location:•Increased exposure to growing emerging markets leveraging future growth

Investor perception:•Enhanced stability and growth potential•Margin expansion through synergies

Mainly due to inflated price expectations, Nutreco decided not to acquire Provimi

Use of proceeds: acquisition rationale

Four parties to convince• Provimi minority

shareholders: 5% trading in Paris. Hold-out mentality requires high bid

• Nutreco shareholders: concerns over overpaying for the acquisition

• Provimi management: post acquisition governance

• CVC/ PAI: Keen to exit after four years. Will want a bid price to ensure IRR of at least 25%

Optimization of capital structure

Return cash to shareholdersPro’s

• Many investors (including activists) take “Cash is King” view

• Immediately EPS enhancing in 2006

• Facilitates Nutreco in optimising capital structure

• Easier option than outright acquisition (transaction risk element)

Con’s

• Limited opportunities for growth, reducing medium & long term value

• Limited availability of funds for significant acquisition growth going forward

• Company becomes a possible target for consolidators

• Little enticement for shareholders to remain on board once cash has been returned

Returning a significant amount of cash will satisfy shareholders and give powerful signal to Provimi

Timing

Method

Amount

Marine Harvest JV•  As soon as possible an (initial) payment of cash (within 2 weeks)

•  No reason to wait

•  A significant cash return will satisfy (activist) shareholders on the short term

•  An early payment of cash will give a signal to Provimi and CVC, Nutreco is looking in to other options to utilise its excess cash position

Share buyback (€65m) •  Positive impact on earnings per share

•  Maximum amount of share buyback (at current share price) is €65m as 10% of shares outstanding is reached

•  Nutreco should cancel the shares as soon as possible to allow for further buybacks

Special dividend (€335m) •  Special dividend for the balance of €335m in order to ensure cash is returned rapidly after announcement

•  Even in case of a large acquisition (Provimi) the current balance sheet structure allows to return €400m of cash at this point of time

•  Amount of €400m is in line with book profit from MH trade sale of €350m

First tranche cash return

Tranche IMid June 2006

• Amount to be returned: €400m• Method:- share buyback €65m- special dividend €335m

Tranche IIOctober 2006

• Amount to be returned: €300m• Methods:- capital remittance €300mor- special dividend €300m

Tranche IIIApril 2007

• Amount to be returned: €200m• Method:- special dividend €200m

2006 2007

Returning cash to shareholders in 3 tranches will allow flexibility for Nutreco to implement its Rebalancing for

Growth strategy

Your Financial Issue?Submit your issue in the survey. One

will be selected for 30 minute coaching session by Fred.

Delivery 4 key financial learnings Data Tuesday’s: March 12 & 26, April 2 & 9Topics Equity, Corporate Finance, Corporate Restructering, Capital Structure For Business Owners and Ambitious ProfessionalsCost €595,-

Entrepreneurial Finance

Live & Own Time

Example Assignment

Entre FinanceSales ManagementLeadership

CALL TO ACTION

KEY LEARNINGS

• Equity raising and venture capital• Strategy• Corporate restructuring• Optimization of capital structure

Thank you!

Entrepreneurial Finance - Fred Huibers

Business

Transcript of Entrepreneurial Finance - Fred Huibers