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Crowe Horwath Webinar

“Trends in Agribusiness M&A”

Douglas G Sterkel Managing Director AgriCapital Corporation July 19, 2011

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Introduction II.

Industry Drivers & Agribusiness Market III. Consolidation Trends IV. Mergers and Acquisitions Activity

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Introduction

AgriCapital is an independent, specialized investment bank that works exclusively within agribusiness.

 Founded in 1983 to meet the financial advisory needs of agribusinesses not being met by the traditional investment banking community.

 Focus and advisory services: • Mergers, acquisitions & divestitures • Private placements of equity and debt • Corporate finance consulting, including valuations  A member of the Financial Industry Regulatory Authority (“FINRA”) and a Registered Broker Dealer

Introduction

AgriCapital serves the agribusiness middle and lower middle market.

 Representative Clients • Family owned / privately held agribusinesses • Small-cap and middle market public companies • • • Multinational agribusinesses Private equity & financial sponsors Cooperatives  Global focus & client base • • • • North America Europe Central and South America Australasia & Asia

July 18, 2011

 Transaction Experience* • • • • • • • • • • • • Animal Health & Nutrition Biotechnology Crop Inputs Crop Protection Grain and Oilseeds Equipment / Manufacturing Financial Services Precision Agriculture Produce & Vegetables Proteins Seed Turf & Ornamental * Does not include all sector experience

AgriCapital - Introduction

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Common Themes in Agribusiness : Increased M&A activity & investment focus.

 Consolidation is occurring across the agribusiness value chain from

“farm to table

”.

• Increased globalization • Increased capital needs • Increased risks & complexity • Issues with succession planning  Capital is flowing into agribusiness from Wall Street, private equity and hedge funds.

I.

Introduction II. Industry Drivers & Agribusiness Market III. Consolidation Trends IV. Mergers and Acquisitions Activity

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Industry Drivers

Agribusiness is going through a dynamic period and a very favorable economic / investment cycle.

 Demand • Creation of a global middle-class is driving protein demand – China, South Asia, & India • Global population growth – 9 billion projected by 2050 •  Supply • Competition for grain Arable land is limited • Available water for irrigation is limited

Market Reaction to Industry Drivers

Unprecedented interest in agribusiness by Wall Street and increased M&A activity.

Public Agribusiness Relative Stock Prices

Significant M&A Activity Minimal M&A Activity Significant M&A Activity 8

Source: Capital IQ. Includes data on a basket of public agribusinesses deemed representative by AgriCapital .

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I.

AgriCapital Overview

II.

Industry Drivers & Agribusiness Market III.

Consolidation Trends IV.

Mergers and Acquisitions Activity

Consolidation Trends

Agribusinesses are consolidating and becoming more global.

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 Globalization of agribusiness is escalating • Companies are seeking economies of scale to maximize efficiency and take as much cost out of the system as possible.

• – e.g. Agrium and Helena’s numerous purchases of regional crop input distribution companies.

Governments seeking “guaranteed and stable” food supplies for their people.

– e.g. Asian companies, in cooperation with government, developing relationships with US companies to source US grain.

• Increased sourcing agribusinesses.

and

competition from international

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Consolidation Trends

Capital requirements of agribusiness are increasing dramatically.

 Increasing working capital and debt requirements are driving M&A activity in certain sub sectors.

 • • Inventory & accounts receivable Margin calls Some “local” companies are outgrowing the capacity of their local banks.

Significant Increases in working capital

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Consolidation Trends

The risks and business complexities are rising in agribusiness.

 Risk, and the necessity for the development of risk mitigation strategies, is driving some M&A activity.

 Lenders are requiring hedging strategies due to the increased value and volatility of commodities and inputs.

 Some business owners do not feel comfortable managing or outsourcing hedging strategies.

Consolidation Trends

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Many agribusinesses face succession issues & difficulties.

    The average age of agribusiness owners continues to increase.

Many business owners do not have descendents that are willing or capable of managing an increasingly more complex agribusiness.

Capital availability of descendents may be limited.

Problems with divergent and extended shareholders, sometimes 3 or 4 generations removed from the business operations.

Consolidation Trends

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Recent (2010/11) AgriCapital advisory assignments.

Seller/Transaction Overview

$60 million revenue, profitable, 90+ year old ag manufacturing company with over 40 3 rd and 4 th generation family shareholders and no ability for family succession. Sold to Kuhn, a subsidiary of Bucher Industries (Swiss conglomerate).

Buyer Motivations

• • • Expansion of global footprint Access to dealer network Synergistic product lines $ 25 million sale (closing 7/22/11) of Digital Angel’s Destron Fearing animal identification business to Allflex. Digital Angel faced significant working capital constraints.

Rapidly growing, profitable, closely held genomics testing business sold to Neogen.

Owners believed that the business needed to be consolidated with a larger company with more global market access to be most competitive.

PHC (PHC: LSX – AIM), divested its US product sales business to Lebanon Chemical. PHC deemed the business non core to its existing development strategy.

• • • Growth of business through better capitalization Manufacturing synergies Presence in swine and companion animals • • Ability to globalize and expand into new product area Increase profitability through corporate systems and management • Ability to integrate and consolidate product lines, inventory and manufacturing.

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I.

Introduction

II.

Industry Drivers & Agribusiness Market III.

Consolidation Trends

IV.

Mergers and Acquisitions Activity

All Industry Transaction Statistics

Total (agribusiness & non agribusiness) M&A deal activity is up in 2011 from the same period in 2010.

 Approximately Q1 and Q2 2011.

a 25% increase in deal value from Q1 and Q2 2010 to  Corporations maintaining cash positions.

currently significant  Increased profitability of operating companies due to cost cutting.

Worldwide Transactions – All Industries

$1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006 2007 2008 2009 2010 2011 Announced Deal Value 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 Source: CapitalIQ

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All Industry Transaction Statistics

 Comparing EBITDA multiples is one of the most common ways to compare valuations of companies.

 TEV/EBITDA = Total Enterprise Value / EBITDA

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 Over the past 5 years, acquirers have been required to contribute more equity as compared to debt when purchasing companies.

operating companies.

This generally has effected financial sponsors more than strategic 100% 80% 60% 40% 20% 0% 8.0x

7.5x

7.0x

6.5x

6.0x

5.5x

5.0x

4.5x

4.0x

EBITDA Multiples by Transaction Size 5.4x

6.2x

6.6x

7.5x

5.2x

5.9x

6.4x

6.4x

5.1x

6.0x

6.4x

6.5x

5.3x

6.0x

6.6x

6.3x

2007 2008 2009 $10-25 mm $25-50 mm $50-100 mm $100-250 mm

Historical Equity and Debt Contribution

2010 18.30% 42.40% 39.30% 13.50% 44.50% 42.10% 15.50% 37.80% 46.70% 12.70% 28.20% 59% 10.20% 36.50% 53.30% 2006 2007 Equity 2008 Senior Debt 2009 Sub Debt 1H 2010 Source: GF Data Resources via GMB

Agribusiness M&A Transactions

Agribusiness M&A activity is currently robust, as it was in 2007.

Total Agribusiness Transaction Value By Category 2005 – 2011 (2 nd Qtr.) Total Agribusiness Transaction Value By Year 2005 – 2011 (2 nd Qtr.) $29 966 $6 107 $55 631 $43 800 Agricultural Machinery and Equipment (Primary) Agricultural Products (Primary) Fertilizers and Agricultural Chemicals (Primary) Veterinary Drugs (Primary)

Source: CapitalIQ

$50 000 $45 000 $40 000 $35 000 $30 000 $25 000 $20 000 $15 000 $10 000 $5 000 $0 Announced Total Closed Transactions

Source: CapitalIQ

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Capital IQ derives its information is from publically announced M&A Transactions and does not include private transactions. Information may also include an announced transaction that did not close. AgriCapital excluded some significant animal health transactions as the human pharmaceutical component skewed the data.

Public Agribusiness Valuations

Valuations for public agribusinesses remain favorable.

Public Agribusiness TEV/EBITDA Analysis 19

Source: Capital IQ. Includes financial data on a basket of public agribusinesses deemed representative by AgriCapital.

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Agribusiness M&A activity

Agribusiness M&A trends AgriCapital’s perspective.

  Market is generally a “sellers market” Global Buyers • It is necessary to completely canvass all possible global buyers, not just domestic buyers, to maximize exit prices.

• Nearly every AgriCapital sell side advisory assignment over the past five years has targeted at least some international buyers.

 Strategic buyers, generally speaking, continue to able to pay higher prices for acquisitions due to synergies.

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Agribusiness M&A activity

Agribusiness M&A trends AgriCapital’s perspective.

  The overall buyer due diligence process is getting more detailed and sophisticated.

Environmental due diligence increased over the past five years.

has dramatically  Lenders discovery.

are requiring more documentation and  Many long time business owners without succesion plans are sensing an opportunity to exit during the current favorable cycle.

Private Equity & Agriculture

There is an unprecedented interest in agribusiness by non traditional financial investors. A new frontier?

 Private equity money and other financial sponsors have activity entered agribusiness.

• • Over 190 private equity firms globally indicate interest in investing in agriculture.* 63 firms are currently raising capital for private equity investments in the sector with an aggregate target of USD 13.3 billion.*  Numerous hedge funds and pension funds investing in agribusiness • • AgriCapital receiving many calls and requests for meetings ETF’s,  direct farmland investment, commodity trading  PE firms are focusing on financial metrics that many agribusinesses do not normally track.

 How compatible will the shorter (as compared to strategic buyers) time horizons of financial buyers be with agribusiness?

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* Source: 2011 Preqin

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Conclusion

Consolidation is expected to continue across the agribusiness value chain from “farm to table”.



Favorable Supply / Demand metrics



Increased globalization



Increased capital needs



Increased risks & complexity



Issues with succession planning

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AgriCapital Contact Information

Douglas G. Sterkel Managing Director AgriCapital Corporation 1410 Broadway, Suite 1802 New York, NY 10018 Email: [email protected]

Telephone: (212) 944-9500 www.agricapital.com