Ceres Global Ag: Of Activist Investors and Asset Sales

A lot has been happening with Ceres Global Ag recently.

In addition to the export hub announced in early February, on March 11th management announced that they were selling the Ralston, WY facility (and the Powell, WY seed plant) to Briess Industries – a Wisconsin based maltster. I have to admit I was somewhat surprised by this announcement as Ralston was (1) a more recent purchases by Riverland Ag (September 2010), (2) likely (although management doesn't break out profitability by facility) one of the better earning assets for Riverland, and (3) an interesting move for a company actively looking to put cash to work in “high-quality grain storage facilities.” To wit (taken from page 4 of the 2012 Annual Report): 

“For example, the facility we’ve acquired in Ralston, Wyoming complements our grain storage business by giving us additional capacity on the western edge of the U.S. heartland.”

And later on the same page: 

“We anticipate similar investments in the coming years as we investigate opportunities in grain and logistics infrastructures.” 

Keep in mind, this is page 4 of the annual report, not some buried footnote on page 52 (hint . . . remember that page number). Page 4 is where they talk about the overall operating strategy for the entire company.

Now, in fairness, maybe management has a viable reason for this sale. The far Western geographic location may have played a factor, as well as the facility’s status as a country elevator and not a terminal elevator. The not well disclosed sale of Riverland’s country elevator in Iona, MN (see page 12 & 14 of the 3Q13 MD&A) would be consistent with this strategy shift, indicating Wahpeton, ND may be on the chopping block as well. Still, to have bought the Ralston in September 2010 and to turn around and sell it in March 2013 (2 ½ short years, but who’s counting) has to be an egg on the face event for Ceres management, and even more important to shareholders, a fairly major shift in the company’s overall strategy.

There may be another reason management is scrambling to right the ship. Remember page 52 of the AR? That just happens to be where “Management Fees and Other Expenses” are discussed. And management fees are at the center of an activist campaign recently launched by hedge fund VN Capital. This morning’s story by The Globe and Mail is the first real media coverage of the battle.

The crux of the campaign is to eliminate the 2&20 hedge fund management fee extracted by Front Street Capital for providing oversight to Riverland Ag and the other portfolio investments. I have been fairly upfront on my thoughts regarding this issue. From my post on June 15th 2012: Ceres Global Ag (CRP): 4th Quarter and Fiscal 2012 Update: 

“One last item – still the biggest issue facing CRP, in my humble opinion, is the dual management structure. A low margin business in a commodity industry cannot sustain the SG&A expense of maintaining two management teams (Riverland Ag and Front Street Capital). This is a key factor to watch going forward.” 

VN Capital appears to have run out of patience on this issue – a move which I personally applaud. Where the activist campaign goes from here, I don’t know. At this point, my limited knowledge of corporate governance would tell me that it depends on how Ceres Board of Directors, particularly the independent directors respond. Do we move toward the special meeting that VN has called for (to hold a vote on the termination of the management contract with Front Street Capital), or does the BoD dig in its heels and we move toward a proxy battle. Proxy battles are long, messy, and – most importantly - costly affairs (look at Jana Partners and Agrium). Hopefully that can be avoided, and a shareholder friendly resolution can be achieved in the coming weeks.

I encourage anyone out there who is a shareholder in CRP to pay attention, watching for (and reading) any information circulars or proxies from the company, VN Capital, or other interested parties so that you can draw your own conclusions in the coming weeks/months.

Full Disclosure: Long CRP

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