Specialty ingredients company, TerraVia (TVIA), announced a dramatic shift in its revenue generation today with the sale of a majority interest in Algenist to Tengram Capital Partners. The company's departure from its primary revenue generator to date marks an all-in approach towards its transition into becoming an ingredients manufacturer and holdings company. By the trading day's end, shares in the company gained 2.76% as TerraVia closed at a price of $2.61 representing a market capitalization of $221 million.
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Since its founding in 2011, Algenist had grown to be the largest revenue contributor to the developing Terravia. In the last quarterly report for example, Algenist contributed $5.97 million in revenue compared to the total product revenue of $7.27 million. Ingredient sales made up the difference. As such, the Algenist brand contributed nearly 82% of the company's product revenue in Q1 2016. That said it is important to remember that the company's ingredient-based revenue is expected to experience a rapid acceleration in the coming year as meaningful manufacturing capacity comes online.
Yet for several years, the Algenist brand had witnessed annual double-digit revenue growth while maintaining lucrative gross profit margins ranging between 60-70%. However, with limited marketing capacity of its own and slower sales growth at Algenist over the past year, TerraVia appeared to consider a sale as it began to refine its own market strategy in the first quarter. Burdened by its own financial weaknesses, the company appeared to be in no position to reinvest into its cosmetics brand in order to take it to the next level.
In the noted agreement with Tengram, TerraVia appears to have uniquely structured the arrangement in order to maximize the company's growth potential for ingredients. TerraVia will retain a 20% interest in Algenist while selling the majority stake for approximately $20 million. Most interestingly, conditions of the sale include a created partnership led by Tengram that would further introduce TerraVia's ingredients into additional beauty and personal care brands. As is to be expected given its proprietary ingredients, TerraVia will also remain as the direct ingredients supplier to Algenist.
Now in the hands of Tengram Capital Partners, Algenist has the potential to develop its brand in a way that TerraVia was never capable of doing on its own. With TerraVia's cash reserves in decline and essentially reserved for the commercialization of its core technology platform surrounding algae-based ingredients, the company's ability to commit meaningful capital towards the marketing of Algenist appeared limited. Indeed, for many years the company had largely relied upon a cash-lite budget heavily leaning on its distributing partners like QVC, Sephora and Ulta (ULTA) to disseminate the word about its new products.
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Yet under Tengram, Algenist now finds itself with an investor committed to introducing "significant capital" to further grow and develop the brand further. In June 2015, Tengram raised $320 million to acquire promising brands in the consumer and retail space. Its intent was to leverage its domain expertise and relationships within the consumer industry in order to unlock additional value. Speaking upon the closing of additional funds in 2015, the private capital firm noted the following:
"We remain focused on finding and investing in brands that are bigger than their businesses," said Matthew Eby, Co-founder and Managing Partner at Tengram. "We seek to pair these amazing, founder-led businesses with our focused, replicable strategy of operational improvements and brand expansion.
For TerraVia, the partial divestment of Algenist falls in line with the company's objective of refining its business strategy into food, animal nutrition, and personal care ingredients. In March 2016, the company announced this more narrow market focus in a move that changed the company's name from Solazyme to TerraVia. At the time, I raised the possibility in an article found here that Algenist might soon be sold. After all, maintaining an in-house cosmetics brand appeared to fall outside of the company's focus area. I theorized that it would be logical for the company to sell the brand in order to stay on as the primary ingredient supplier thereafter.
With today's announcement, that lingering speculation was put to rest. Moving away from the direct control of brand development, the company was able to shift back into its more established role as an ingredient manufacturer and innovation developer. Several additional implications can be noted in the majority interest sale of Algenist. The event had the following effects on TerraVia:
- Reduces Employee Expenses. By selling a majority stake in Algenist, TerraVia sheds the burden of maintaining the Algenist staff. This frees the cash-strapped TerraVia of employee positions that may have found limited synergy with the rest of the company's business segments. Potentially, it may also help reduce some of the company's cash burn moving forward.
- Retains Some Upside Potential. By retaining a minority share in the equity, TerraVia reserves a capacity to benefit from the ongoing improvement of the brand outside of its control.
- Provides a Cash Infusion. With the approximate $20 million to be realized by TerraVia upon the deal's closing, the company advances much of the income that would have been derived over years from owning the brand outright. This is especially important considering the company's declining cash reserves in the present along with a loss-generating production ramp-up now underway. As such, cash remains of great importance. This is particularly true as a depressed stock price has simultaneously hindered the company from raising capital at ease.
- Creates a Dedicated Customer. While the new relationship with Algenist is sure to come with significantly less revenue generation and thinner profit margins, the new supply agreement with Algenist allows for TerraVia to still profit as an ingredient manufacturer. In addition to this, the company essentially retains an exclusive relationship with the new client given that its product lines are wholly dependent upon TerraVia's technology.
- Nourishes a New Partnership. Not insignificant in itself, uniting the interests of Tengram and TerraVia now opens a new opportunity not unlike that of the new relationship between TerraVia and VMG Partners. With the new Tengram-led partnership, TerraVia leverages a new partner's capital and industry influence in order to further expand the company's ingredient sales. This new relationship should aid TerraVia in capturing new clients. Additionally, it should allow for its unique ingredients to be incorporated into existing brands or in new brands now under development.
- Provides Room For Algenist to Expand. With significant capital expected to be poured into the brand along with greater industry expertise coming from the new investors, Algenist should be able expand in scope beyond its current capabilities. This bodes well for TerraVia who will directly benefit from the role as an ingredient supplier as well as an equity shareholder.
For investors of TerraVia, today's announcement characterizes the company's ongoing process of shedding of non-core assets. Solazyme Industrials still remains on the chopping block as well. This is the case as the company seeks to unlock the value of its assets and focus on the algae platform's commercialization. While Algenist has historically represented the company's primary revenue generator to date, it has long been understood that the company's value lies in its developing technology platform more so than its brands.
With the company now refining itself into becoming an ingredient manufacturer operating at scale, the sale of Algenist provides a departing contribution from what was once simply perceived as an opportunistic marketing experiment in its creation. Algenist has always been viewed as a poster child of the universal success that the company's ingredients could translate into. After all, it is not every day that a company focused on researching biofuels could simultaneously establish and build momentum for a high-margin, algae-based cosmetic line. Yet this is precisely what occurred.
Today, TerraVia continues to wisely leverage its assets in order to further its development. While some may have been disappointed by the $20 million price tag associated with the 80% sale, investors would do well to remember that the company also gained a willing partner in the process. Tengram Partners is a well-financed private equity firm with access to multiple brands in the consumer space. More importantly, the firm has conditionally agreed to establish a partnership with TerraVia with the sole intention of embedding the company's algae-based ingredients into additional products.
With significant manufacturing capability now coming online, the ability to divest one brand in order to penetrate several others remains a savvy path to follow. TerraVia is now focused on accelerating the demand for its ingredients. With VMG Partners, the company seeks to leverage a firm with considerable influence in food. With Tengram Partners, the company seeks to leverage a firm with considerable influence in beauty products.
TerraVia continues to keep its options open as it transforms into an ingredients manufacturer and holdings company. The fact the company retained a minority interest in Algenist illustrates its continued willingness to invest into its own products' futures. Time will tell if the sale will result in a re-invigorated brand. But for now, investors can rest assured that the company has purchased more time for its own commercialization. TerraVia can now focus all of its momentum into the manufacturing of specialized ingredients.
Disclosure: I am/we are long TVIA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.