Case Studies

Driving Global Value for Equity Sponsors as CRO in the Agricultural Production Sector

CRO/Interim Management/Financial Advisory/Compliance and Regulatory/International Transaction Advisory

AgFeed Industries Inc is a large global agricultural company that produces premix and blended feeds and animal nutrients for hogs, as well as hog production across North America and China. In 2007, the company expanded its operations in China to the hog production market with more than 20 hog farms and 5 large mill farms. They expanded further into the U.S. market through the purchase of leading US hog producer M2P2 in 2010, with peak production in 2012 at over 1.3 million hogs per year and sales of over 75,000 tons of hog feed to more than 650 large-scale farms and 1,000 retail customers.

AgFeed’s business continued to grow through the use of 10 sow farms in North Carolina, Oklahoma and Colorado, two feed mills in North Carolina and Colorado, and a 68-acre breeder farm, with peak production in 2012 at over 1.3 million hogs per year, including purebred Yorkshire, Landrace, and Duroc hogs. The feed business also expanded to sales of over 75,000 tons of hog feed and feed additives to more than 650 large-scale farms and 1,000 retail customers under more than 20 different brand names.

In January of 2012, AgFeed determined it would need to restate financial statements going back to 2007 after a special-committee probe into accounting issues at its animal nutrition and legacy farm hog operations in China. The company also had been involved in a dispute with its main US customer, Hormel Foods Corp. (HRL) that led to an arbitration award of $7.9 million against AgFeed in early 2013. In the settlement AgFeed and Hormel agreed to wind down their business relationship by the end of the year. This decision spurred an event of default under the company’s $68.5 million credit facility, which matured in February and had not been repaid.

In February 2013, Mackinac Partners was engaged to work with AgFeed as the company’s financial advisor and Chief Restructuring Officer by the company’s independent directors. Mackinac Partners Senior Managing Director, Keith Maib, who was named one of the Top 100 Global Restructuring and Turnaround Professionals by the Global M&A Network earlier this year, served as the CRO for AgFeed.

After significant due diligence analysis and counsel with AgFeed’s corporate, legal and investment banking professionals, and in the effort to return maximum value to shareholders, Mackinac Partners led the AgFeed team in determining the most effective strategy – an orderly sale of the U.S. and China operations. Due to the credit facility and liquidity issues, and the loss of the primary US hog contract, the plan was to take the company into Chapter 11 protection while identifying potential buyers for the company’s assets and operations and while managing current operations and liquidity issues.

In July 2013, AgFeed Industries Inc. filed Chapter 11 in US bankruptcy court. Shortly thereafter Mackinac Partners worked with AgFeed’s investment bankers and attorneys, including Business Development Asia (BDA), to begin the process of identifying potential buyers for the US operations.

“We took a very traditional §363 out of court marketing approach followed by a bankruptcy filing and motion of approval for the US sale, which provided a 25% premium to value over the stock, but most importantly provided the liquidity and the runway to proceed with the sale of the China operations” Senior Managing Director Keith Maib said.

To effect the marketing and sale, Mackinac Partners and BDA managed a facilitated bid process in August that included an early stalking horse bid by the Maschhoffs that set the floor for the auction. However, after 14 hours and 35 rounds of bidding, AgFeed’s attorneys and creditors opted for a three-party transaction instead that included less cash but added more than $12 million in additional value to the terms of the deal’s structure.

All parties worked closely together structuring and finalizing the deals which resulted in High Plains and Cohoma – subsidiaries of Iowa’s Tri Oak Foods, acquiring AgFeed’s assets in Oklahoma and Colorado, and Murphy-Brown purchasing the company’s operations in North Carolina. The three groups also split AgFeed’s assets in Iowa. The transactions were critical in generating sufficient liquidity to begin marketing and ultimately sell the China operations.

Following the sale of the US operations, Mackinac Partners and BDA began work on the sale of AgFeed’s Chinese operations which encompassed two business lines: animal nutrition (premix, concentrates and complete feeds), and hog production. With an annual capacity of 400,000 hogs, AgFeed China is one of China’s largest commercial hog producers from 16 traditional farms and two modern enterprise scale farrowing operations. The animal nutrition business operates from five locations in Southern China and is one of the largest specialist premix feed companies.

“The complexity of these deals required both gaining liquidity for the Chinese sale and navigating an array of intricate Chinese social, tax and governmental compliance issues,” Mackinac Partners Senior Managing Director Keith Maib said. “Due to the historical tax, accounting and compliance irregularities related to Chinese operations, we had to identify a buyer for the Chinese assets who was not only an established operator in China but could also navigate the myriad of issues at hand,” Maib said.

Mackinac Partners fielded a team that was fluent in the local languages and conversant in the local customs to work closely with the US and China offices of BDA in preparing the asset marketing and sales facilitation.

“We needed to affect the sale of assets outside of China because the repatriation of the cash would have made things very difficult to sell inside” Maib said. “So we were looking for a unique buyer: a Chinese operator to buy Chinese assets in a stock transaction despite fraud concerns and accounting irregularities, and to do that within a competitive bid process through the US Bankruptcy courts. It was a very complicated set of circumstances.”

Despite the complications, Mackinac Partners and BDA were able to work through due diligence and disclosure issues, prepare the assets and bid room, and facilitate the sales process, identifying a serious buyer for AgFeed’s Chinese operations in November. A deal was completed in December that included the sale of all of the outstanding capital stock of AgFeed Industries Inc., the holding company for AgFeed’s Chinese subsidiaries, to Ningbo Tech-Bank Co Ltd and its subsidiary Good Charm International Development Ltd. At the closing of the China transaction, AgFeed received net cash proceeds, after fees and expenses of the transaction, of approximately US$44.5m.

“The circumstances of the sale of the China operations were particularly complex and noteworthy as we believe this is the first ever acquisition by a Chinese company of the Chinese operations of a US Chapter 11 debtor.” said Jim Weissenborn, Mackinac Partners’ Co-Founder and Managing Partner. “The Mackinac Partners team worked closely with Young Conaway, BDA and Foley to deliver exceptional results in the orchestration and closing of the sale transactions. It was a terrific team effort”.

“AgFeed China and USA businesses are both well-respected, high quality hog production businesses, which have found strong future owners” Euan Rellie, Senior Managing Director at BDA, said.

“Against a difficult industry backdrop, the hog production industry globally continues to consolidate. We appreciated the opportunity to work with multiple stakeholders and Mackinac Partners to manage the complex sale of these leading agribusiness players” he said.

As it is in business, anytime you are taking the road less traversed there are great experiences as well as lessons learned.

“The sale of the assets in China was so different than a traditional §363 process where you are setting a hard floor for the transaction. There was never a hard floor, it was a constant renegotiation and re-approval of a deal that kept presenting new challenges, so we really had to keep pushing through the issues to get the transaction done” Senior Managing Director Keith Maib said. “The fact that we got it done here (in China) hopefully opens doors for others on future opportunities”.

For all parties involved in this complex global transaction, including BDA, Mackinac Partners, Foley and Larner LLP, and Young Conaway Stargatt & Taylor LLP, there has been significant industry recognition for their combined efforts.

Select awards and recognition presented to Mackinac Partners for this engagement:

Turnaround Management Association:

2014 Transaction of the Year – Large Company for AgFeed Industries, Inc.

M&A Advisor Atlas Awards:

International M&A Deal of the Year
Agriculture Deal of the Year
§363 Sale of the Year

Association for Corporate Growth (ACG®):

2014 Champions Award – Mackinac Partners for its role as restructuring financial advisor and Chief Restructuring Officer to AgFeed Industries, Inc.