Interview of S&W Seed Company for its acquisition of SV Genetics

Lytham Partners talks to S&W Seed Company regarding the recent acquisition of SV Genetics Pty Ltd (“SVG”), based in Queensland, Australia. SVG is a provider of proprietary hybrid sorghum and sunflower seed germplasm. The acquisition expands S&W’s product portfolio by adding two complementary crops that are expected to provide diversification into higher margin opportunities while leveraging the Company’s existing infrastructure. S&W is the global leader in alfalfa seed, with unrivaled research and development, production and distribution capabilities. S&W’s capabilities span the world’s alfalfa seed production regions, with operations in the United States, Australia, and Canada, and S&W sells its seed products in more than 30 countries.


Talk about the acquisition and what it means for S&W?
[MG] We believe this acquisition has the potential to generate meaningful revenue through the introduction of these two new product lines, sorghum and sunflower, and additional income streams from royalties. We believe these new product lines are a solid complementary fit in the key markets where S&W has current alfalfa seed business including North and South America, Africa, the Middle East, Australia and Europe. We also believe there is solid potential for these products to be sold through our existing channels to markets as well as cross-selling synergies whereby S&W alfalfa seed can be sold through SVG’s existing channels. In addition, we believe the SVG sunflower genetics have market potential in regions,including Central and Eastern Europe, China, where S&W currently has little or no presence but has dormant alfalfa seed products--acquired in the Pioneer acquisition--that we plan to sell into these respective markets in future years.

Why do you believe this is the right time to expand into complementary crops?
[MG] We believe SVG’s products are complementary to our core focus in alfalfa, with very near term sales synergies that we hope to take advantage of. With our established infrastructure, we see this as a unique opportunity to diversify our product offering; and leverage our distribution channels with a relatively modest investment. We view this as a low cost / low risk entry into some potentially large addressable markets. We feel very fortunate to have been able to come together with some tremendous human capital assets like Dave and Alan. They are highly respected in the industry and we feel they add quite a bit of strength to our agricultural executive experience and expertise. I thank them very much for joining us.

Why did you choose sorghum and sunflower as your first foray outside alfalfa?
[MG] Sorghum is an extremely complementary crop to alfalfa. 

Similar to alfalfa, sorghum grows well in poor soil and drought conditions, thanks to its hardiness, market versatility and highquality seed. Sorghum requires less water to grow than many other crops, and is generally used as a replacement for corn and other grains in areas where water is scarce. In Africa, sorghum is a food staple for human consumption. With water availability becoming a significant issue in many countries, the importance of sorghum as a more drought tolerant crop is increasing. The utilization of forage sorghum and sweet sorghums for alternative ethanol production options also remains relevant for the future. 

Sunflower remains an important crop in Eastern Europe and Russia. It is well suited to the climate and soil types, and sunflower oil is well accepted in that marketplace and throughout Europe. Sunflower also offers traits such as mono-unsaturated and polyunsaturated fatty acid profiles, which address market demands for healthy vegetable oils. 

We feel it’s a very good fit with the infrastructure we have in place with our specialty crop division and we’re also looking at potential synergies for our stevia products. So we thought it was a tremendous fit, and we were very happy we were able to get this completed.

Talk about the market size and competitive landscape for sorghum and sunflower?
[DH] We estimate that the forage sorghum markets are around the $50 million mark globally, and grain sorghum more like $245-$250 million. A little larger for sunflower. Sunflowers in Central & Eastern Europe and Russia around $900 million--very significant crops in those regions--and with production in other regions the worldwide market would probably be around $1 billion to $1.2 billion. In addition, we believe there are other opportunities to potentially develop non-GM forage and grain corn products for sale into the existing S&W channels and also SVG channels.

What does the patent profile for the new acquisition look like?
[AS] SV Genetics is not focusing on patentable traits. We believe it could patent its genetics in the US system but not in the rest of the world. We feel that our excellent producability of its parents in the hybrid production process will continue to differentiate SVG in many ways. This focus alone should offer collaborators a significant market advantage by developing products that perform well in the farmers field and in the seed production phase. Hybrid seed that can be produced at less cost than its competitors is essential in improving net margins and profitability.

What is your long-term growth strategy within sorghum and sunflower?
[MG] We’re focusing our considerable efforts to pursue additional new opportunities in the North and South America, and Middle East / North Africa markets in grain sorghum, as well as increased emphasis on Sunflower in Europe. We’ll look to extend our growth into these regions with significant crop rotation capabilities and more of a onestop shop distribution unit operation. We feel it’s a very positive move.

Over the last few months, there has been a tremendous amount of M&A activity, from FGI's acquisition of two alfalfa seed traits from Monsanto, to the much larger potential consolidations. Can you discuss what you see taking place and where the opportunity is for S&W to benefit going forward?
[MG] It’s not new for seed companies to purchase traits or to consolidate and leverage experts to focus in specific crop markets. Outsourcing is done when one can do it better and/or for less cost, saving each party the time and money involved in the process by reducing the costs of companies working on the same trait.

The ability to work with the experts to outsource R&D for specific trait development for specific crops also reduces costs for everyone involved and accelerates development of product lines which result in improved yield, quality and protein that will feed the increased population. S&W with its large grower and distribution networks is expected to benefit from these continued consolidations, collaborations, joint ventures, and various relationships. Improved R&D strategies will result from these types of combinations. By increasing our global footprint and expanding the agronomic crop benefits of our strategic traits that our developed by our breeders, we expect this will also provide the ability to grow crops around the world in poor environmental conditions whether due to a weather event or from soil and water issues. And this should also enhance and improve these conditions by growing these crops through reclamation with proper variety selection and enhanced agronomic management and technologies. The bottom line is that long-term soils and water table improvements that should allow future generations the ability to feed the world.

In addition to that, just recently FGI purchased two traits from Monsanto. I think this provides some validation in the market on how alfalfa is looked at and the long-term potential that alfalfa can bring and the macro-trends there are in the protein play in the global market today. These M&A activities with the large Ag consolidators should result in a lot of exciting opportunities for a lot of people including S&W when we look at the potential of maybe spinning things off or adding additional core product lines. It’s a pretty exciting time for us.

Why hasn’t S&W pursued developing a hybrid alfalfa?
[DG] The short answer is the amount of hybrid vigor exhibited by alfalfa make the pursuit of hybrid alfalfa unattractive from a business perspective.

What are the challenges with developing and producing hybrid alfalfa?
[DG] The genetics of alfalfa is more complicated than sunflower or Sorghum. Its genes reside in a state known as polyploidy, which makes it impossible to create inbred lines. Without these distinct inbred lines, pure hybrid cultivars cannot be obtained and the amount of hybrid vigor is less than other crop species. Additionally, pollination in alfalfa is difficult compared to other species. Pollination in hybrid crops requires movement of the pollen from the male to the female parents in a hybrid seed production field. In alfalfa pollination is not efficient in a conventional variety and a hybrid alfalfa becomes exceedingly difficult to achieve efficient pollination.

Finally, a breeding program must exhibit continuous genetic gain to remain competitive. S&W has developed a breeding system we feel is the most effective in the industry and will allow us continued
growth in market share.

What does the margin profile look like for the business?
[MS] This is new for us. Because this is a royalty based model, the gross margins are comparatively high. In future years, we are expecting gross margins from the acquired business to be in the 85% to 90% range. And probably more importantly, our EBITDA or Operating Margins are expected to be in the 55% to 60% range within the next 2 years. Which we’re really excited about.

For more interview questions, please read the original version: SVG Interview Transcript | Executive Interview Series.