Case Studies — Southern States

$1.5 billion agricultural business

HAMSTREET ROLES:  Assessment, CRO, Operational Turnaround, Financial Restructuring

SUMMARY:  Highly complex case involving a failing cooperative with multiple ventures and an intricate network of faltering financial arrangements. Negotiations involved hundreds of parties and a large, internally divided bank group. Hamstreet & Associates achieved a dramatic turnaround and refinance outside of bankruptcy.

THE BACKGROUND:  This company is one of the largest and most venerable farmer-owned agricultural supply cooperatives in the US. Originating in the early 1920’s as a feed supplier, it gradually branched out to furnish farmers in mid-Atlantic and southern states with a wide range of goods and services, including fertilizer, crop protectants, seed, feed, farm supplies, and petroleum. Over time the co-op added grain storage, insurance, financial, and other services to its repertoire. By the mid-1990’s, this historically profitable business earned annual revenues of more than $1.5 billion.

In 1997, the co-op’s new CEO initiated an aggressive growth strategy and acquired a livestock exchange, a large agricultural inputs business, and a northeastern dealer network. The company started up a fish farming enterprise and a big-box urban retail garden store chain; it also actively added new dealers and accommodated customers with liberal pricing and credit practices. Meanwhile, it continued to diversify its ownership of smaller ag-related businesses. This rapid expansion, however, led to significant losses, climaxing at $54 million in 2002. The new acquisitions lost money due to stiffer-than-expected competition, poor markets, loose credit practices and inefficient management. Led by an executive subsequently convicted of fraud, the unprofitable fish farm plunged the cooperative into litigation, while the big-box garden store project also failed. A generally depressed agricultural market and poor weather conditions combined with bad debts, tense creditor relations, dwindling ability to borrow money, and sharp contraction in working capital, to send the cooperative into a financial tailspin.

THE CHALLENGE:  The co-op defaulted on loan covenants and lost what little faith its secured lenders had left, while vendors began to insist on COD terms. At the same time, rumors of the co-op’s imminent bankruptcy flew everywhere and eroded the confidence of its own membership of 300,000 farmers, whose cash investments each winter into interest-bearing accounts called PBC’s supplied a vital infusion of working capital. In the late summer of 2002, under sharp pressure from the bank group, the cooperative turned to Clyde Hamstreet, as Chief Restructuring Officer, and his team of associates for assistance. By that point, most industry and many internal observers believed the company would not survive. Other large ag co-ops had recently failed or were about to; if the prevailing opinion proved accurate, this one would soon join the crowd.

Our turnaround team faced unique and tremendous obstacles. As a first step, we assumed tight control over the company’s complicated cash flow structure, strictly regulating expenditures and limiting PBC withdrawals. We focused on maintaining the co-op’s operations by establishing active, open communications with all lenders, including the member-farmers with their essential working capital contributions. We performed a rapid but thorough assessment, reaching the conclusion that the co-op had viability in four core businesses, and that liquidation would fail to pay off secured debt. We also determined, despite considerable pressure to file in Chapter 11, that bankruptcy would destroy the company’s chances by squandering the PBC base and vendor capital support.

THE RESULTS:  The restructuring plan included several complex components. Over a 22-month period, Hamstreet’s team successfully carried out each one.

  • Sold 90% of non-core assets and some high-value core real-estate assets to pay down debt.

  • Reduced working capital needs by more than $100 million.

  • Preserved funding sources by:

    • demonstrating that the company’s going-concern value significantly exceeded liquidation value;

    • restoring vendor confidence;

    • restoring member confidence in their PBC investments;

    • repairing bank relationships, despite scar tissue from some painful loan histories;

    • developing enterprise value to the point that outsiders made serious, unsolicited offers for portions of the company’s core business, thus encouraging the bank group to keep with the turnaround process into its second year.

  • Restructured seller-financed debt on a previous acquisition, with the seller agreeing to surrender $100 million in security. This negotiation yielded a profit-and-loss gain of $65 million.

  • Worked out a five-year plan to cure $130 million of unfunded pension obligations.

  • Settled litigation stemming from the fish farm fraud and terminated contracts to exit that operation.

  • Entered into new long-term financing to improve liquidity and meet payment demands of existing lenders.

  • Transformed corporate culture from one of laxity and entitlement into a modern business enterprise relying on incentive pay and employee accountability. At the same time, we valued and retained the “neighborly” feel of farmer-friendly operational practices that co-op-members historically appreciated.

  • Instituted sound management practices, grooming a new management team with good morale and appropriate business values.

  • Improved corporate governance by introducing independent board members and increasing board activity and responsibility in the cooperative’s affairs.

With Hamstreet’s help, the cooperative mounted a dramatic return to profitability. From an EBITDA of $2 million in 2002, the 2004 figure rose to $44 million, with projections to reach $60 million soon thereafter. The cooperative’s total liabilities to net equity ratio went from 8.91% in June 2003 to 2.48% in June 2004, while the bank group’s lending commitments decreased from $380 million in June 2002 to $159 million in June 2004.

But the numbers don’t tell the story all by themselves: Hamstreet’s efforts also saved some 4,000 jobs, along with a company of great economic and emotional significance to many rural communities in the Southeastern US. The turnaround of this company provides an industry model for other agricultural and cooperative businesses.

For this engagement, Clyde Hamstreet and his second-in-command each received the Turnaround Management Association’s 2005 Turnaround of the Year award in the Mega Company category (firms in excess of $1 billion written revenue).