COOPERATIVE CAPITAL ALTERNATIVES COOPERATIVE CAPITAL ALTERNATIVES
Presentation to
Davidson Overview Cooperative Capital Alternatives Trust Preferred Stock Perpetual Preferred Stock CHS Case Study Concluding Thoughts
FARMER COOPERATIVES CONFERENCE
By
D.A. Davidson & Co.
October 30, 2003
Davidson Overview
One of largest independent regional investment firms in the country $70 million in equity capital $15 billion in total client assets under management Significant brokerage network 40 offices largely in western U.S. $13.5 billion in assets under management Strong investment banking capabilities Helped corporate clients raise over $1 billion in past year Advised on numerous merger & acquisition transactions Respected research coverage of food and agribusiness Tim Ramey, Senior Analyst Coverage of Hormel, Kraft, Kellogg, Smithfield Foods, Interstate Bakeries, American Italian Pasta, CHS, etc.
Retail Brokerage Institutional Sales & Trading Equity Research Investment Banking
Spectrum of Capital Alternatives
Straight Debt Trust Preferred Perpetual Preferred Convertible Debt Convertible Preferred Common Stock
Alternatives can be placed privately or through public capital markets
Trust Services Corporate Services 401K, option exercise programs, etc.
In either public or private distribution, alternatives include individual or institutional investors
Higher degree of flexibility in capital = higher cost of capital
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Cooperative Capital Considerations
Limited access to equity capital Restrictive legislation Capper-Volstead 8% limitation Dividend allocation rule How can earnings be retained? Revolving accounts Permanent retention Long-term liquidity of owner/member “investment” Opportunities for differentiation; stronger alliance of company and member interests
Cooperative Capital Considerations
GOAL – ESTABLISH A STRUCTURE THAT ALLOWS COOPERATIVES TO COMPETE WITH OTHER COMPANIES IN THE CAPITAL MARKETS
Cooperative Capital Alternatives
COOPERATIVE CORPORATE
Straight Straight Trust Trust Perpetual Perpetual Convertible Member Convertible Common Common Debt Debt Preferred Preferred Preferred Preferred Debt Retention Preferred Equity Stock
Cooperative Capital Alternatives
Straight Debt
Trust Preferred Perpetual Preferred Member Retention Common Equity
Used by all cooperatives
Operating line or term debt
Low cost of capital
Burden/risk of leverage
Limited borrowing capacity/restrictive covenants
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Cooperative Capital Alternatives
Straight Debt Trust Preferred Perpetual Preferred
Cooperative Capital Alternatives
Straight Debt Trust Preferred Perpetual Preferred Member Retention
Member Retention
Common Equity
Common Equity
Used by many cooperatives
Used by few cooperatives
Redemption policy or revolving reserve
Full conversion to C-corp or spin-out of non-patronage business
Attractive source of capital
Benefits and disadvantages of corporate entities
May affect competitiveness/member support
Lose the advantages of cooperatives
Preferred Stock Alternatives
Straight Debt
Trust Preferred Stock
Straight Debt
Trust Preferred
Perpetual Preferred
Member Retention
Common Equity
Trust Preferred
Perpetual Preferred
Member Retention
Common Equity
Source of near-equity capital Subordinated to bank debt; senior to member equity Requires quarterly dividend payments
Affiliate trust formed to issue preferred, cooperative incurs subordinated debt Possible public or private issuance Must be repaid in 10 to 30 years
Access to public or private capital markets Available to investment grade (or equivalent) companies Prepayable in five to ten years at par Non-voting Attractive cost of near-equity capital (7% to 8%) Payments treated as interest No dividend allocation rule issues Tax benefit for portion allocable to non-patronage New FASB rule will probably require treatment as a liability
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Perpetual Preferred Stock
Straight Debt Trust Preferred
CHS Case Study
CHS, Inc.
Perpetual Preferred
Member Retention
Common Equity
Issued by cooperative
No maturity date/repayment obligation
Payments treated as dividends Subject to dividend allocation rule Favorable tax treatment to investors
Cenex Harvest States (CHS) is one of the nation’s leading integrated agricultural companies. Headquartered in Minneapolis, CHS is a cooperative by structure and is owned by farmers and ranchers in the western US. They buy commodities from and provide services to their Coop members as well as other customers in the region. CHS divides their operations into five segments: Agronomy, Energy, Country Operations, Grain Marketing, and Processed Grains and Foods. For the fiscal year ended August 31, 2002, CHS had total revenues of $7.8 billion.
Permanent equity capital
CHS desired a mechanism whereby the Company could use the perpetual preferred security to redeem patron’s equities. This accomplished several goals, including preserving cash for growth initiatives, providing liquidity for members in the form of a freely tradable security and providing an instrument with which to pursue various corporate financing objectives.
CHS Case Study
Company objectives: Strengthen and diversify capital structure Raise permanent equity capital Improve flexibility Access the public capital markets
CHS Case Study
Company/Davidson Solution: Issue perpetual preferred stock in public offering Allow prepayment at par in five years Allow for annual issuance to members under formula Broadly distribute shares to individual investors
Provide additional currency to redeem member equity and achieve other objectives Clearly demonstrate liquidity for shares
List and trade on Nasdaq National Market
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CHS Case Study
Potential Concerns: Would cooperative structure be confusing? Would difficult operating environment and recent bankruptcies create concerns? Would market rates be within 8% limit? Would absence of a rating limit demand? Would securities regulators accept cooperative governance structures? Would limited existence/performance of prior cooperative offerings cause investor concerns? Offering Results:
CHS Case Study
Offering size increased from 2.9 million shares to 3.5 million due to excess demand CHS raised $86 million in permanent equity Shares placed with 8,000 investors in 39 states Shares have traded up from $25 to $27.40 (current yield 7.3%) Average daily volume since offering of 9,000 shares ($240,000)
CHS Case Study
Company Benefits: Added "third leg" to capital structure Increased permanent equity from $205 million to $290 million Strengthened borrowing relationships Validated financial strength in capital markets Created tool to redeem patron equity − Preserve cash − Enhance member loyalty/align interests Created possible currency for acquisitions Enhanced visibility, achieved competitive differentiation and strengthened brand equity
Concluding Thoughts
Cooperatives need to consider capital alternatives Options are available to strengthen/diversify capital structure while maintaining cooperative status
Private and public capital markets are receptive to cooperatives with demonstrated financial strength
Cooperatives need to carefully consider objectives and concerns before pursuing a capital alternative
Preferred stock, debt, common equity, or various member retention arrangements can all be viable alternatives
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