LV grass seed company weeding out its competition

Monday, March 2, 1998 | 9:03 a.m.

Imagine a type of grass that stays green with minimal watering in the summer heat and fights off insects and disease at the same time.

Or a type of cotton harvested directly from the plant that incorporates the best features of the traditional fiber and polyester.

Or a food product that looks, smells and tastes like beef, but has no cholesterol and even fights cancer.

The principals of a Southern Nevada-based company share these dreams and are embarking on a bid to turn the science of biotechnology into a profitable venture in the seed industry.

To get to the point where there's plenty of capital to spend on genetic research, AgriBioTech Inc. -- a 4-year-old publicly traded company -- has been consolidating the $1.1 billion forage and turfgrass seed production industry at a supersonic rate.

The forage and turfgrass segment of the agricultural industry is one of the last to experience a consolidation. The industry has been fragmented with only a few key players exerting any dominance in an industry filled with mom-and-pop seed producers scattered nationwide.

But Johnny R. Thomas, chief executive officer and president of AgriBioTech, and his partner, John Francis, vice president of the company, set out to grow the company through acquisitions.

The long-term strategy is to quickly build a network of sales and distribution points, consolidate management and build operational efficiency, then devote a larger percentage of profits to research and development, which in turn, will develop new types of seeds that will grow more specialized types of grasses.

Technology in the industry has advanced to the stage that scientists will be able to access the genes necessary to engineer the development of grass species that would be resistant to certain types of disease and insects. It also could produce hays and alfalfas that would enhance nutritional values, digestability and mowability.

That means grazing livestock could feed on forage that would have additional nutrients for the consumer -- eat a hamburger, get a vitamin. And it's possible to get milk, straight from the cow, that won't irritate your stomach.

For the golf course, the bioengineers could develop turfs that stand up better to any 9-iron-wielding hacker. Thomas and Francis admit they wish they could spend more time testing that angle, but have been busy building their company.

In order to get to the point of devoting 9 percent to 15 percent of company revenues to research and development within 10 years instead of the less than 1 percent dedicated today, Thomas and Francis devised a strategy to consolidate the forage and turfgrass seed sector in the same way it had been done for seed producers of other crops like corn and soybeans.

When buying up companies, AgriBioTech not only acquired assets, sales forces, distribution points and customers, it scooped up some key personnel.

In 1995, the first year the strategy was in place, ABT acquired six companies, picking up 127 employees. Ultimately, those acquisitions accounted for 1997 sales of more than $34 million.

The brisk pace of acquisition has continued: 1998 is only two months old and ABT already has announced deals to buy seven more companies. Those purchases landed the company as the No. 1 grass seed producer and No. 10 among all categories of seed producers in the world. The company's goal is to have 45 percent of the market share by the end of the calendar year and the most recent acquisitions should bring it to about 35 percent.

With the 1998 company acquisitions, ABT will have picked up 30 companies in 17 transactions since the doors opened April 1, 1994. In some of the acquisition, several companies were picked up in one deal.

Thomas said one of his most humbling experiences was knocking on the door of a company for the first time to propose a buyout.

"It was a little difficult," Thomas recalled. "I remember when we went in there and made our proposal, they talked to each other for awhile, then they turned to us and said, 'We've determined that we should be the ones buying you.' So that was how we got started."

But he also said it was gratifying to be rejected by a company that later came back to him asking to be acquired.

Thomas said AGB is now able to use its size to offer company benefits to employees that hadn't ever been offered before -- enhanced insurance programs, 401(k) retirement packages, stock options, etc. -- and a vision for the future.

Possibly the biggest obstacle the company faces in its rapid growth plan is meshing the many corporate cultures that come into the fold. That, in part, is where making Las Vegas home comes in handy.

The closest distribution and production facilities for ABT are in Southern California and Northern Nevada. No seeds are produced in Las Vegas -- but seeds of trust and friendship are nurtured in the city's resort atmosphere.

"Nevada is a great place for managers and people to get together," said Thomas. "So we'll have cultural discussions and negotiations here. It's perfect with all the hotels and amenities."

The state's business-friendly atmosphere completes the package as corporate profits can be brought into the state with minimal tax consequences.

Thomas and Francis first came to Las Vegas to enjoy the friendly business climate after growing up in farm families in eastern New Mexico. Thomas was brought up near Estancia where his family grew alfalfa and maintained dairy cows. Despite a small-town atmosphere with a graduating class of 24 students, Thomas attended Oregon State University and studied genetics.

Francis' family was in ranching. The two met in 1982 through a mutual friend who recognized they had similar goals and aspirations.

They formed FiberChem Inc. in 1986, a Las Vegas-based company that marketed pollution monitoring devices. Working in the roles of chairman and president, Thomas and Francis stayed on through March 1994, resigning to devote their energies to ABT.

Thomas and Francis took on the task of acquiring companies without the resources of investment bankers. Thomas credited Bank of America Nevada with "a tremendous leap of faith" in providing capital for the company, which grew from a $1 million line of credit at start-up to $30 million today.

"They came in to us with a story that made a lot of sense," said George Smith, president of Bank of America-Nevada. "We saw they had an extremely impressive management team and they went from zero to $330 million in sales in three years. Impressive people with a lot of vision allowed us to move forward on this."

Today, AGB is one of the darlings of Wall Street, although there is minimal coverage of its industry by analysts. In 1997, the company's shares gained 680 percent in value, making it the seventh-best performing stock among all issues closing higher than $2 per share that year.

Of six analysts covering ABT, three give it strong buy ratings and three list it as a moderate buy.

Analysts boosting the company give several reasons they think it will continue to be successful:

* Biotechnology is a hot new industry. In a recent edition of the Wall Street Journal, William Kirk, a senior vice president of DuPont, explained the chemical giant would plow more into research and development for biotechnology than chemicals in the decades ahead. "The next Silicon Valley is plant biotechnology," Kirk said. The managers at AgriBioTech have taken that philosophy to heart and cite the DuPont executive's views as the direction the industry is headed.

New York-based brokerage Donaldson, Lufkin & Jenrette, in a research report on the merits of investing with ABT, was enthused with biotechnology's arrival at the golf course. " ... Many proven genetic engineering techniques can be readily transferred to grass from corn, cotton and soybean where these technologies have already been proven," says the DLJ report. "Currently, none of the major players in the agricultural biotech sector has a large market presence in the forage and turfgrass sector (and) it is likely they would be eager to set alliances with ABTX in order to participate in this increasingly exciting market opportunity."

* AgriBioTech has secured top-notch managers. "Many of the pillars of the industry are in the AgriBioTech fold," said George Dahlman, a research analyst and managing director for Piper Jafray of Minneapolis, Minn. "They've shown how serious they are with the people they've gotten. They're for real."

In November, the company announced that Kent Schulze, former president and chief executive officer of Northrup King Co., Minneapolis, and the former president and chief operating officer of DeKalb-Pfizer Genetics, DeKalb, Ill., would join the company in January as chief operating officer.

It also announced that Thomas Rice, former president and chief operating officer of DeKalb Plant Genetics, the chief architect of DeKalb's biotechnology strategy, would join AGB as a vice president and director of research.

* The company's acquisition strategy is working. "A lot of the previous consolidation efforts in the forage seed industry have been confederations and alliances," Dahlman said. "There's been no real effort to bring them all under one wing."

He added the catalyst for the strategy has been similar movement in the corn and soybean sectors. "There's the feeling that if the (forage) industry itself doesn't do this, somebody may come in from the outside and try," he said.

The company's distribution and sales network has spread to 48 states and 51 foreign countries.

* The stock is strong. Although the stock suffered a minor dip in January, attributed to a technical reaction to the rapid share price increase that occurred since early December, it's still close to historic highs. The stock traded last week at about 14 1/2. In the past year, it has climbed from 2 1 / 4 in April to 19 9/16, its highest point, in early January. Analysts project the price to rise to $25 to $30 by the end of the year.

Analysts also estimate earnings per share to climb from the loss column to around 27 to 30 cents by the end of the current fiscal year. Salomon Smith Barney projects earnings to reach 63 cents by the end of the 1999 fiscal year and $1.05 by the end of the 2000 period.

The company had its first profitable quarter -- 3 cents per share -- in the first quarter of its 1998 fiscal year, ending Sept. 30. But it slid back to losses in the second quarter, 5 cents per share, in the wake of the wave of acquisitions.

"You can't call them a flash in the pan, which usually involves one-product companies like Iomega with its Zip Drive," said Kenneth Pounds, a senior analyst with Nutmeg Securities Ltd. of Westport, Conn. "It's not that kind of store."

Of course, there are hurdles to clear and risks on the horizon for AGB.

As in all agricultural ventures, the weather can wreak havoc on production and sales. However, the company is geographically diversified and appears capable of handling anything El Nino throws its way.

Some analysts expressed some minor concerns over the impact the Asian financial crisis would have on the company's market. But they also pointed out the marketplace is global, which should minimize the impact sales from any one region would have on the company.

The biggest worry expressed by the analysts is on the company's ability to absorb so many different companies smoothly.

"Their biggest enemy could be themselves," said Piper Jafray's Dahlman. "Can all this be pulled together? People who were competitors have to march to a new corporate order. There can be some rather significant problems. But Johnny Thomas has recognized this and is trying to offset those risks."

Pounds of Nutmeg Securities pointed out it may be difficult for the company to carry out all the changes it envisions because the new companies being acquired by ABT will have some long-term obligations to existing customers. Three-year contracts have to be honored on the previous company's terms.

He's also concerned about adapting infrastructure -- a problem Wells Fargo Bank experienced when it absorbed First Interstate.

"Among the challenges they face are trying to rationalize all the operations, eliminate the redundancies, modify compensation plans and integrate computer systems," Pounds said. "They can't effect extremely rapid change. But they're committed to bringing in the companies first, then working with the margins."

Then, there's the question of whether investors will be able to maintain patience as the AGB strategy takes effect.

Thomas was clear in the company's recent annual meeting with shareholders that he's not really interested in investors who are in it to make a quick buck.

"We want people who are committed to sharing the vision of this company's goals," Thomas told a gathering of about 100 at the Sunset Station hotel-casino.

But would Thomas and the board sell out, as one Wall Street analyst suggests in one of his stock-market scenarios? It's not likely, said Thomas when asked at the meeting, noting that he still has a vision to be a leader in biotech research.

"It's a joy and a delight to watch this team we've assembled work," Thomas told the group. "But if somebody does come with a proposal to buy us, they had better bring lots of money."

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