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Monday, Oct 2, 2023

American Vanguard Fights Proxy Battle

FINANCE: Agriculture company's profits criticized

A Wall Street activist fund is challenging a Newport Beach-based agricultural products company whose chief executive has been on the job for 28 years.

New York-based Cruiser Capital Master Fund LP is seeking three seats on the nine-member board of American Vanguard Corp. (NYSE: AVD), whose market cap stood around $700 million as of last week.

“From 2011 through 2021, American Vanguard’s revenue grew from $301.1 million to $556.9 million while its absolute profits stayed the same,” said a letter from Cruiser Capital to shareholders.

“AVD’s board authorized $250 million of acquisitions over the last eight years, but its return on investment is unclear. What is clear is that AVD’s EBITDA margins have declined from 18% to 11%.”

The activist battle comes after American Vanguard has navigated a period of stagnant crop prices by diversifying, and is now aiming for a sales spurt to push its revenue close to $1 billion annually by 2025.

Eric Wintemute, who has been American Vanguard’s CEO since 1994 and chairman since 2011, didn’t take kindly to the proxy battle.

“Remarkably, Cruiser’s director nominees have no plan, lack any expertise that would be additive to your board and, in some cases, lack the desire to serve as directors,” said a letter co-signed by Wintemute and lead independent director John Killmer.

Proxy adviser Glass Lewis & Co. last week sided with the activists, saying American Vanguard has “very poor shareholder returns, deteriorating operational metrics, ballooning expenses, poor investor communications and an alarmingly stagnant board.”

“The case here is relatively clear,” said the May 19 report by Glass Lewis, which recommended voting for Cruiser’s board nominees.

Since the company announced its 2021 results and 2022 forecast and the proxy battle became known on Wall Street, the American Vanguard’s shares have climbed almost 50%, giving the company its highest valuation in several years.

Corn Collapse

Founded in 1969, American Vanguard provides products such as mosquito controls and herbicides to protect crops like soybeans and corn.

A storm came in 2014 when the price of corn collapsed and American Vanguard saw its revenue fall 22% to $298.6 million. The shares, which reached around $35 in 2012, have hovered between $10 and $20 for most of the past decade.

The company decided to reduce its reliance on corn through acquisitions. It also developed a technology called Simpas, which it calls “game-changing” by enabling farmers to optimize data on plant nutrition and soil health inputs. The technology has more than 20 patents and another 30 pending.

It also began a Green Solutions unit with more than “120 breakthrough biological solutions.” It has about 50 issued patents and about 100 patents pending.

Last year, the company reported sales rose 21% to $557 million. The one analyst who covers the company is estimating annual revenue projections of 13% growth to $627.6 million this year and another 10% to $692 million in 2023.

American Vanguard got off to a good start this year when first-quarter sales increased 29% to $149.4 million while its earnings before interest, taxes, depreciation, and amortization rose 65% to $22.9 million.

“We are pleased to report an extremely strong start to 2022 at both the top and bottom lines,” Wintemute said in a May 4 statement.

While most of American Vanguard’s revenue is in the U.S., it’s also expanding to Latin America, Asia, and Australia.

The company is aiming for $947 million in sales in 2025, according to a projection on its deck. Its green initiatives will provide $140 million while its Simpas will be $113 million.

The global crop protection industry sold about $60.8 billion in products in 2020, the company said.

As of Dec. 31, American Vanguard employed 804, including about 60 at its 19,953-square-foot office at the MacArthur Court office complex in Newport Beach.

Cruiser Capital said it doesn’t intend to cut jobs.

The Battle

Cruiser has about $131.5 million in assets and was founded in 2013 by Keith Rosenbloom, who has over 25 years of investing experience and who emphasizes applying traditional value oriented private equity techniques to public and private special situations. He’s long been critical of management and boards of directors.

“What’s interesting is you have a lot of companies where executive compensation bears no relationship to delivering value to shareholders,” Rosenbloom said in a 2019 article in Forbes. “Today the median pay for CEO’s in the S&P 500 is now $1 million a month or $12 million a year. If you’re going to get paid like a professional athlete, you should deliver a championship.”

Wintemute’s total compensation in 2021 was $2.5 million, up 13% from the prior year, according to the company’s most recent proxy. He owns 1.14 million shares, or 3.7% of the company, worth about $23 million at press time.

The fund said it invests in financial and industrial sectors, seeking turnaround opportunities in underperforming businesses.

About a year ago, it began buying shares of American Vanguard. Cruiser said it owns 778,354 shares, about 2.5% of American Vanguard’s outstanding shares now worth around $17 million.

In its letter, Cruiser said there’s been “a persistent track record of underperformance, operational shortcomings and corporate governance failures that have occurred under the current board of directors and management team.”

Cruiser’s presentation said American Vanguard’s share price has underperformed in the past decade. It printed a chart showing the stock has fallen 7.7% in the past 10 years as of March 7, the day it submitted a proposal for new board members. Over the same period, rivals such as FMC Corp. (NYSE: FMC) have grown 223% and UPL Ltd. (NSE UPL) is up 802%. The S&P 500 rose 279% during that period.

“We believe that AVD, if guided properly, can be worth between $55-$60 per share by 2025,” the presentation said.

Cruiser has nominated two other board members in addition to Rosenbloom:

  • Mark Bassett, who was chairman and CEO of Hemlock Semiconductor, with approximately $1 billion in revenue and 1,200 of employees; and
  • Patrick Gottschalk, former chairman and CEO of Union Carbide, a unit of Dow Chemical, from 2007 until 2012, and is currently a board director at Superior Plus Corp. (TSX:SPB), which has a $1.8 billion market cap.

‘Bizarre Charge’

In the past month, the two sides have launched a barrage of criticisms at the other side.

Rosenbloom “manages a hedge fund that we believe to be comprised largely of his own family’s wealth—and based on TipRanks.com, Cruiser exemplifies abysmal financial performance, ranking in the bottom quintile of the 390 hedge funds reviewed by TipRanks,” American Vanguard said in a letter to investors.

A Cruiser spokesman told the Business Journal that among its best activist fights was helping A. Schulman Inc. raise its share price from $26.85 per share to $42 a share when it was acquired in 2018 and Ashland Global Holdings (NYSE: ASH), helping the shares rise from $81 to $98.86.

American Vanguard also questioned Cruiser’s three proposed directors as lacking expertise and “concrete recommendations.”

“The Cruiser Nominees appeared to view the Company’s business as largely identical to chemical manufacturers, without noting the close relationship between the Company’s business and other agricultural businesses,” the board said in a letter to shareholders.

The American Vanguard board also added that Cruiser’s nominees “appeared less than enthusiastic about serving on the board.”

Rosembloom retorted, “This claim is inaccurate and bizarre. Dr. Bassett and Mr. Gottschalk have invested countless hours into researching AVD, they have invested $1.5 million of their own money in AVD both directly and alongside Cruiser.”

By running for only three seats out of nine available, Cruiser won’t be able to control the board even if it wins.

“The nominees want to work constructively with the rest of the board to make operational improvements, enhance stockholder value and improve transparency throughout AVD,” a spokesman said. “As far as next year, if operations are not improving, then perhaps we would nominate other highly qualified directors.”

When announcing its annual meeting—which will be held virtually June 1—American Vanguard increased its dividend for the first time in four years, paying 2.5 cents a share each quarter, up from 2 cents.

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Peter J. Brennan
Peter J. Brennan
Peter J. Brennan has been a journalist for 40 years. He spent a decade in Latin America covering wars, narcotic traffickers, earthquakes, and business. His resume includes 15 years at Bloomberg News where his headlines and articles sometimes moved the market caps of companies he covered by hundreds of millions of dollars. His articles have been published worldwide, including the New York Times and the Washington Post; he's appeared on CNN, CBC, BBC, and Bloomberg TV. He was awarded a Kiplinger Fellowship at The Ohio State University.

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