GPRE - Green Plains: Activist Involvement Can Unlock Value For Shareholders

2023-09-01 14:50:00 ET

Summary

• One of Green Plains Inc.'s major shareholders, Ancora Holdings, is sending strong letters to the company in an aim to unlock value for shareholders.
• We believe that the company has an unexpressed potential and its earnings and cash flows have been depressed in recent years.
• A potential sale of the company under strategic review could be worth up to $50 per share, according to our own valuation model.

Green Plains Inc. (GPRE) has been at the center of allegations of insider stock transactions and overall misconduct. One of their major shareholders, Ancora Holdings, accused the company and in particular its CEO of:

curiously-timed stock sales, lack of operational and safety acumen, and outdated leadership style.

We think that activist investors' involvement can often unlock value for all shareholders by making the decision-making process more subjective to strong accountability. We thus analyze this situation closely and provide some valuation ranges.

The overview - business model and past results

Green Plains is in the business of producing and marketing ethanol and other low-carbon fuels in the U.S. The company has four operating segments: Ethanol Production, Agribusiness and Energy Services, and Partnership. The Agribusiness and Energy segments engage in grain procurement and other commodities trading activities.

Overall, the company is operating in a very low (gross) margin business, and the Capex requirements are also eating out cash at record speed. They were able to slightly grow revenues in the last 5 years, from $2.4 billion in 2019 to $3.6 billion in 2022. However, if we analyze the gross profit profile over a larger data set, the results are not as comforting.

Green Plains is operating under a highly volatile gross margins environment that makes even the shortest-sighted business planning hard. This is likely the main reason why they have accumulated the $500 million in debt on their balance sheet .

Free cash flow - computed as cash from operations minus Capex and excluding M&A expenses - is also very volatile. In the last 4 years, despite pleasing revenue growth, the company was not able to convert it into positive cash flows. With a possible recession looming over the U.S., the future of the business is uncertain as demand for fuel is of course very dependent on business and economic conditions.

An activist investor may turn the fate of Green Plains

On July 11, 2023, Green Plains received the letter from one of their largest shareholders, Ancora Holdings, who controls around 7% of the share capital. In the letter, the investor highlighted serious concerns about the company and its management, and in particular about the CEO, Todd Becker. The letter discussed the poor performance of the business and stated that it is likely driven by bad management decisions. Ancora cites that in the last quarters, despite the strong performance of the ethanol market in its aggregate, Green Plains reported a surprising net loss per share of around 90 cents.

The other major point raised by the investor was around the profit per gallon of their ethanol business, stating that:

In the second quarter of this year, the Company generated just $0.01 per gallon in an environment in which industry ethanol margins were more than $0.50 per gallon.

This is clearly an unacceptable performance given that companies in this sector need to capitalize on strong demand very quickly and very aggressively to have a chance to reward shareholders. This is not happening and the management could be likely the cause of this underperformance.

However, the letters of Ancora Holdings are not new to the company and its shareholders. In January, the shareholder encouraged the company to put itself up for sale in another public letter , estimating that:

a Sale to a Strategic Acquirer Would Yield $50 Per Share or More for Shareholders, Likely Representing the Best Risk-Adjusted Path Forward.

We agree with this activist investor, as we think that the path forward would be tremendously de-risked by handing the keys to another management team at a bigger company. Synergies, vertical integration, or other important restructurings can unlock significant value later and justify a premium now for Green Plains shareholders. Let’s have a look at the fair value per share under a possible transaction.

Valuation: fair value in the event of a possible sale

Evaluating a company like Green Plains is difficult for one main reason: its business is highly volatile and cyclical. Thus we cannot just take last year’s EBITDA or revenues and attach a random multiple. In their letter, Ancora did not disclose how they ended up with a $50 per share fair value, but after careful analysis, we found a similar range.

We will do the following: compute the average EBITDA of the years between 2013 and 2019, this is to show the state of the company as fully operational and with the current strategic and efficiency flaws completely resolved. The logic is that a buyer would be able, in a reasonable time span, to restore the company and its margins at the same levels reached in those years, considering that demand for ethanol and the current market is very strong. We weigh this as 90%.

Then we will also compute the last 4 years (2019 - 2023) EBITDA, and use it to compute the so-called “other part of the valuation”. This is to show the potential risks and weaknesses, both idiosyncratic and systemic related to a Green Plains acquisition. The logic is that a potential acquirer may find itself with a negative EBITDA following a transaction, and we need to adjust the takeover price for this scenario. We weigh this as 10%.

Computations:

• Phase 1 (2013 - 2019): average EBITDA of $165 million, attaching a multiple of 20x = fair value per share of $54.

• Phase 2 (2019 - 2023): average EBITDA of $3 million, attaching a multiple of 20x = fair value per share is negative.

After weighting the final result is an aggregate fair value per share of around $49, representing a potential upside close to 60% from the current price.

Risks

We think there are several risks embedded. The main one is that the company maintains the “status quo” by not improving operations nor exploring strategic alternatives such as a sale. This may delay the value unlocking for shareholders and eventually decrease the potential multiple and value per share of a sale.

We also think that other risks affect the business which are not idiosyncratic, and this clearly refers to the conditions of the ethanol market, the energy markets, and thus the economy as a whole. This is, of course, a macro risk, but we cannot understate it, and it could have an impact on a potential transaction too.

Conclusion

Green Plains is an interesting company with clearly valuable assets. However, in recent years a mix of variables, including management’s decisions, did not provide shareholders with the deserved cash flows and earnings. This prompted the rise of an activist investor who is pressuring management with very strong letters that call for changes. We believe this process could unlock value and are aligned in our valuation with the valuation proposed by Ancora Holdings, of around $50 per share.

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