Rentech May Get a Bid - But Don't Count On It

Nov.20.07 | About: Rentech, Inc (RTK)

Rentech (NASDAQ:RTK) popped yesterday following the announcement that Sherwood Overseas Investments is interested in taking the company private at $2.70/share. Currently, RTK is up 21% at $2.15, though it saw a high of $2.33 (up 32%) earlier. It appears to be pulling back now.

Sherwood sent a letter (copied below) to the board stating their rationale that the recent weakness in RTK's share price may hinder their ability to execute their business plan and even suggested they spinoff their recently acquired fertilizer business.

I am currently a shareholder with a long-term vision (see my previous article). While the letter does highlight some great reasons to own shares of RTK (especially given the recent run-up in other fertilizer companies), I don't think this deal will happen for two reasons:

1) The management team at RTK is relatively new. I'm sure that they all have long-term visions here and are expecting to gain personally from a major increase in the company's valuation over the next 5-10 years. A $2.70/share buyout is hardly striking it rich.

2) They just acquired the fertilizer plant in East Dubuque, IL for the very purpose of driving their own proprietary technology to commercialization. They need this plant to develop, test, and prove their technology is profitable and scalable. Spinning this business unit off makes no sense to me.

Overall, this is great exposure for Rentech. Hopefully this will show potential investors just how undervalued RTK is given their growth potential and industry trends. Despite my better judgment, I did not sell on the news. I would have been kicking myself if it does continue higher. Instead of trying to trade around this, I will simply continue to hold. As always, there is a high risk involved in investing in a small-cap issue such as this, but the potential reward is extremely high if you have a long-term vision.

Dear Mr. Ramsbottom, Sherwood Overseas Investments Limited has accumulated an interest in 4.675 million shares of Rentech Inc. (RTK) representing 2.86% of the shares outstanding. While oil prices continue to flirt with their all time highs, Rentech, through its patents, owns the technology to produce ultra clean diesel and aviation fuels. These fuels can be produced in an environmentally friendly fashion utilizing resources (feedstock/s) that are abundantly available in the United States with total per barrel production costs that are less than half the current cost of a barrel of oil. Rentech has also announced that it is nearing the mechanical completion of its $45 million Product Demonstration Unit that is expected to produce its first fuels by spring 2008. The PDU will allow Rentech to demonstrate its fuel technologies and will no doubt create numerous lucrative licensing opportunities.

In addition to the fuel technology outlined above, Rentech owns a fertilizer plant in East Dubuque Illinois. On September 30th, 2007, Rentech completed the first full financial year that included ownership of this facility during which the price of fertilizer escalated dramatically and source costs (natural gas) have declined. You have yet to release your full year numbers but we calculate the fertilizer facility to be producing EBITDA in excess of $25 million and climbing. Furthermore, the increase in corn plantings in the US for ethanol production and the shortage of US fertilizer facilities suggests that fertilizer pricing is likely to remain strong for the foreseeable future. Consequently, publicly traded fertilizer companies are trading near their 12 month highs with several enjoying valuations in excess of 18x EBITDA.

In the last 10-Q Rentech reported cash and marketable securities in excess of $63 million and it had no borrowings on its credit line. You have announced that Peabody has a $10 million option to partner with you on some fuel production facilities and the state of Mississippi has granted preliminary approval for the issue of up to $2.75 billion of bonds for your planned plant at Natchez. Denbury Resources Inc. has agreed to purchase the sequestered CO2 from the Natchez facility in order to use it for enhanced oil recovery and several pieces of legislation are before Congress that could provide further federal incentives to build your production facilities. The United States Air Force has begun the certification process to ensure that its entire fleet will be able to accept Rentech's fuels by 2011 and some of their aircraft are ready for you now.

It appears that Rentech has the benefit of owning tremendous assets at a time when they are critically needed in the United States (and elsewhere). Unfortunately, your stock price closed on Friday at a 52 week low. We are concerned that your weak share price may hinder your ability to execute your business plan and suggest that you should consider either taking the company private or spinning off the fertilizer operation. While not wanting to distract management from the important tasks at hand, we would be willing to put together a proposal at $2.70 per share to take the company private.

We look forward with interest to your timely response.

Yours sincerely,

Julian M. Benscher

Authorized Signatory Sherwood Investments Overseas Limited

Disclosure: Author has a long position in RTK