Tuesday, February 04, 2014

Rentech Tug of War

Last month a shareholder group led by two of Rentech’s largest shareholders sent a letter to the biofuel developer’s board of directors.  Rentech (RTK: Nasdaq) is a drift the group claims.  The alternative energy business has failed.  The fertilizer plant is a bust and the wood pellet project is never going to deliver adequate return on invested capital.  What is more management is paid too much for the size of Rentech’s operations.  The group wants its own slate of nominees in the proxy for director positions.

Rentech leadership responded to the letter with a polite promise to consider the qualifications of the nominees.  The company’s annual meeting is expected later this year.

So let’s take a look at the four nominees ourselves.  All four have lengthy lists of prior experience in venture capital and private equity.  The have been board members of this company and that company.  However, only one of the four, Larry Holley, has any operating experience, including a stint at a fertilizer production plant.  He is also the only one of the four that has an engineering background.

Investment bankers and venture capitalists make excellent board members.  They know how to read the financial statements.  They are skilled at calculations of profitability and returns on investment.  They look good sitting around the board room in suits.  Unfortunately, financiers can quickly figure out the odds on someone else’s innovation, but little vision of their own.  We could expect this group of nominees to tell us a great deal about how little merit there is in Rentech’s present game plan, but not much more.

Shareholders can also expect this group of nominees to find a number of very clever ways to direct Rentech resources to the two firms leading this concerned shareholder group  -  Engaged Capital and Lone Star Value Management.  Activist shareholder groups typically have little reticence in accepting consulting fees, director compensation and other creative compensation arrangements to the benefit of their expertise.

Cash usually shouts loudest when it comes to telling a company’s story.  In the most recently reported twelve months Rentech converted 6.9% of its sales to cash, generating $26.8 million in operating cash flow.  That is below average for a fertilizer operations, but mighty impressive for a company developing alternative energy technologies. 

Rentech leadership may need to sharpen its collective pencil to refine its strategic plan, not to mention do a better job of executing on its various projects.  However, in my opinion, the slate of new directors offered by these ‘concerned shareholders’ does not appear qualified to sharpen, refine or otherwise execute on much more than their own special interests.

Next post we will look more closely at Rentech operations  -  pulp, pellets and fertilizer.



Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

 

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