It was a terse announcement that crossed the wire early yesterday morning from Fortress SZYM, without warning except perhaps to equity analysts that hopped on a hastily-arranged call. Solazyme and Roquette Frères were announcing the dissolution of their two-year old joint venture, Solazyme Roquette Nutritionals.
The cause, “divergent views on an acceptable commercial strategy and timeline for the manufacturing and marketing of joint venture products” and in the announcement, Solazyme tipped that it “intends to accelerate commercialization of its suite of innovative microalgal food ingredients.”
Now, announcements by the #1 hottest company in the sector, as voted by Digest readers, that it intends to accelerate its pace of commercialization, would not ordinarily prompt a sell-off of its shares and a 13% one-day drop in its share price. Especially when that commercialization announcement is not paired with a dilutive financing event.
Simply put, the market was shaken yesterday. Our Vince Vaughn just broke up with Jennifer Aniston, and now shareholders are throwing tomatoes at the screen.
But important to note – this is styled as a disagreement on timeline, rather than technology. The primary product in question, Solazyme Roquette algal flour, has been cleared by the FDA and commissioning of what had been expected to be the next-phase in commercial capacity built-out, in Lestrem, started on time.
Positive or Negative?
Here’s a digest of reaction from equity analysts:
Pavel Molchanov: “From a substantive standpoint we think it will be neutral – and may even end up being positive in the long run. The most important point to underscore is that Solazyme has a wide range of other partnerships – including two new ones initiated just year-to-date – so the end of the Roquette relationship is much less impactful for the company’s opportunity set than the market seems to be perceiving.”
Rob Stone and James Medvedeff, Cowen & Company: “We recommend investors take advantage of share price weakness as an entry point. Breaking up the JV should have minimal, noncash financial impact. SZYM should now be able to fully consolidate this attractive, high-margin opportunity. It has retained most of the SRN employees. We believe it could readily expand capacity for this market and has ample cash to do so.
Ben Kallo, R.W. Baird: “The dissolution shouldn’t have a material financial impact in the near term. If SZYM is able to bring nutrition products to market more quickly, the dissolution would prove to be a positive for the company over the intermediate term.”
Mike Ritzenthaler, Piper Jaffray: “The history of the Industrial Biotechnology space is littered with major strategic partners pulling out of agreements that struggled during commercialization – when promise doesn’t match up with reality. Now we can add Roquette to that list…We can presume that if profitability was as near at hand as Solazyme’s management team would have us believe, Roquette’s hat would still be in the ring.”
Alyce Lomax, The Motley Fool: “Solazyme’s trip to the woodshed is hinged on actual news and, unfortunately, it’s one of the market’s biggest decliners as of this writing…but we shouldn’t rule out that the partnership’s dissolution may actually end up being better for the long term, not worse. Solazyme said that the failed partnership will not affect this year’s revenue; if it can accelerate ramping up its business, then it could be a strategic positive for its shareholders.”
lternative Production Strategies
According to Pavel Molchanov, “Solazyme’s pilot and Peoria facilities will be used to meet near-term demand, but an unspecified amount of incremental capital could allow the Bunge and ADM plants to produce the ingredients, providing some optionality. Of note, both these plants remain on schedule and on budget, with the Bunge plant in Brazil on track for initial production in 4Q13 and the ADM plant in Iowa set to start up in early 2014.”
Rob Stone and James Medvedeff add: “We believe SZYM could take over customer development shipments from the Peoria plant and it has the ability to expand the 20K MT Clinton plant with ADM up to 100K MT. The $125MM convert deal in Q1:13 should provide ample cash for the next phase of expansion.”
But Mike Ritzenthaler cautions: “What we feel is critical for investors to keep in mind is that growth is not determined by Solazyme. Instead, demand dictates how much volume capacity is necessary to meet a given market, regardless of the expansion potential at the Moema and Clinton facilities. We believe that what investors should take away from the news this morning is that the fundamental economic undercurrent on demand for these new products is softer than expected, and we continue to advocate for a cautious approach to SZYM shares.”
Let’s put the Lestrem facility in context, in terms of adding capacity. Yes, it was hoped that the Lestrem facility could ultimately provide up to 50,000 MT, by 2018 or so, and Moema’s capacity is expected to be restricted between now and 2015 — but Clinton, IA is also scheduled to ultimately expand to 100,000 MT, too.
The Digest’s Take
“I don’t want to to wait for our lives to be over
I want to know right now what will it be
I don’t want to wait for our lives to be over
Will it be yes or will it be sorry?”
Paula Cole, “I Don’t Want To Wait”
There’s a temptation to see these break-ups in the context of financial disagreements on the forecasts. That Solazyme sees the future in rosier terms than Roquette. That Roquette is a smart company, and is pulling back because it sees a speed-bump down the road. That technology considerations aside, Solazyme may not be able to muscle into enough markets at sufficiently attractive returns.
But that’s the conclusion that’s driven by the assumption that rates of return mean the same things to all parties — that risk lies only in technology or in market acceptance. But risk lurks also in differentiated opportunity. A/k/a “the unexpected, bigger upside opportunity for our capital in the general direction of elsewhere.” Most would be lucky to be with Jennifer Aniston; others also have options with Angelina Jolie.
To give an example, let’s say you and I were to form a business — for example, operating a gas station. Then Warren Buffett comes along and offers you, but not me, an opportunity elsewhere.
You might find yourself, regretfully, rethinking your earlier decision on the gas station. Nothing to do with the price of, or demand, for gasoline. But you might be explaining to me that we have, unexpectedly, developed divergent opinions about the right commercialization strategy and timeline for our venture. And I might be explaining to you that — to paraphrase Paula Cole: “I don’t want to wait for my life to be over – is it “yes” or is it “sorry”?
The Chevron Tale
It is, for example, the reason, so far as we understand it, that Chevron downshifted away from biofuels in 2009-2010 — as we examined in “Who killed $2.18 gasoline?”
At the time we wrote:
“The Bloomberg report points to an internal Chevron report, written in 2009, that concluded it would be cheaper to buy renewable energy exemptions than make renewable fuel. According to Bloomberg, a few months after the report appeared, Catchlight’s budget was scaled back. Originally the venture was intended to build 17 plants by 2029, making 2 billion gallons of renewable fuel, starting with a $370 million commitment by 2013 and a first commercial plant in 2014.
“The projects were projected to make a return on investment of between 5 and 10 percent per year, compared to Chevron-wide average return of 17 percent. According to Bloomberg, the Catchlight board said in April 2010 that there was “no urgency” in advancing the technology, set the minimum annual return at 20 percent to greenlight a project, and reduced Catchlight’s 2013 budget from $370 million to $8.9 million.”
It’s a cautionary tale in many ways. Not the least because oil companies didn’t do a good job of forecasting the price of RINs and are now freaking out over the prospect of paying out zillions to cover the emission credits they would have hedged by building low-carbon fuel capacity. Putting the all-out war against the Renewable Fuel Standard in an interesting context.
But, in this context, consider that the classic saw with joint ventures is that “you only ever do one” not just because of divergent opinions about the joint opportunity, but divergent opportunities external to the JV.
JVs are a form of living together without getting married — sometimes partners have divergent levels of commitment when they decide to shack up — and divergent opportunities elsewhere when the moving boxes appear.
This article was originally published on Biofuels Digest and was republished with permission.
Lead image: Broken heart via Shutterstock