Rentech Inc., which has been trying for years to commercialize its biofuel technologies, has received a substantial investment from a unit of Blackstone Group to speed its refocusing on new lines of business.
The company, based in L.A.’s Westlake district, received $150 million from a unit of Blackstone, the proceeds of which will be used to expand its efforts in wood processing. The investment came in the form of the purchase of $100 million in convertible preferred stock and a $50 million loan that will mature in five years.
Investors were cheered by the deal, sending Rentech’s shares up 20 percent for the week ended April 16 to close at $2.18, landing it among the week’s biggest gainers on the LABJ Stock Index. (See page 56.)
The money will be used to expand the company’s wood-processing business, which it started last May after acquiring Fulghum Fibres, an Augusta, Ga., wood chip-processing company.
Rentech, formed in 1981, was initially a clean-energy company, developing synthetic fuels and generating electric power from carbon-containing materials such as biomass, waste and fossil resources.
The company spent much of the past decade trying to cash in on the promise of biofuel production. But as the fracking boom took hold and natural gas prices fell, Rentech began looking for other business opportunities while trying to find licensing deals for its alternative energy technology in developing countries.
“We were looking for criteria that work different than alternative energy,” said Julie Cafarella, Rentech’s vice president of investor relations and communications. That criteria was that the new lines of business had to be growing globally, have returns in the midteens or higher, generate immediate or near-term cash flow and use existing technologies.
“What we were doing in alternative energy was developing first-of-its-kind technology that has never been utilized before,” Cafarella said. “What we use in wood chipping, wood pallets and fertilizer, they are demonstrated off-the-shelf technology and that was important for us when we were looking at new businesses. We wanted to enter into a business that was using established technology.”
Outside pressure
As part of its pivot, Rentech ceased its alternative energy research and development efforts last year, laying off 65 in the process. It is selling its alternative energy technology and equipment to Sunshine Kaidi New Energy Group Co., a Chinese company.
The move came as a result of pressure from activist shareholders, led by Engaged Capital and Lone Star Value Management. The pair issued a letter last month asking Rentech to suspend any capital raising plans, saying “management was constantly chasing additional growth initiatives, continuing to acquire assets to add to its list of potential projects despite never actually completing a single one.”
It estimated the company had spent $500 million of shareholders’ capital in alternative energy business from 2005 to 2012, and has written off the majority of the capital spent on acquisitions and development projects.
Rentech responded by promising a change in board membership and establishing a five-member finance committee to oversee capital spending and executive pay in a deal that was announced concurrently with Blackstone’s investment.
Michael Ray, an independent director, and company co-founder Dennis Yakobson resigned from the board, and the company brought in Blackstone’s Douglas Ostrover and Patrick Moore as directors.
Representatives of Blackstone did not respond to a request for comment. Engaged Capital said it was satisfied with the settlement but declined to comment further.
The focus on nitrogen fertilizer manufacturing reflects a new look at a business it entered in 2006 after acquiring a plant in East Dubuque, Ill., to make alternative fuels. A spike in nitrogen prices that year caused Rentech to reconsider its approach.
It spun off its fertilizer business in 2011 as Rentech Nitrogen Partners, in which Rentech Inc. controls about 60 percent of the shares.
“As long as people consume more meat and grains, it’s going to increase the prices of grain and meat, and that has a catalyzing effect on the prices of fertilizers,” said Reuben Sequiera, chemicals, materials and food analyst at Frost & Sullivan, a San Antonio consulting firm.
He said the North America fertilizer market is worth about $27 billion annually. But as with many other commodities, fertilizer prices are volatile. It is also a very mature market largely taken by big players.
That’s why Rentech is trying to expand the wood-processing business. In addition to the 32 wood-chipping facilities operated by Fulghum, the company is building two wood pallet manufacturing facilities, which are expected to be up and running this year.
In a recent conference call with analysts, Chief Executive D. Hunt Ramsbottom said the company wanted to spin off the wood-processing business next year. As the majority shareholder in a publicly traded company, Rentech Inc. would gain tax advantages and pay out more available cash to shareholders.
