Dolphin III Seeks RTK/RNF Value Maximizing Strategic Alternatives Process; A Rapid Spin-Off Of RTK's Wood Fibre Businesses -- Sees Significant RTK Share Upside

PR Newswire

GREENWICH, Conn., June 26, 2014 /PRNewswire/ -- Dolphin Limited Partnership III, L.P. and certain affiliates ("Dolphin III"), a long-term sizable holder of Rentech, Inc. (NASDAQ symbol:  RTK or the "Company"), today announced that it is informing RTK's shareholders of certain strategic initiatives Dolphin has advocated to RTK as a result of its interaction with the Company during the past 18-months in order to enhance the value of Rentech Nitrogen Partners, L.P.  (NYSE symbol:  RNF) and generate a significant increase in RTK's current share price:  (i) the rapid spin-off vs. an IPO (which is subject to a customary discount, underwriting fees and market risk) in a Master Limited Partnership ("MLP") of its wood fibre processing businesses; and (ii) the establishment of a strategic alternatives process to maximize value for RTK's 59.8% interest in RNF.  Dolphin III believes that a successful strategic alternatives process that drives RNF to approximately $30 per unit would generate a near 50% increase in RTK's current share price.

A spokesperson for Dolphin III added, "With an expeditious spin-off of the wood fibre processing businesses, the strategic alternatives process should explore:  (i) methods to efficiently recombine the remainder of RTK (23.25 million RNF units, its General Partner and sizable federal and state NOL's) with RNF to create a more sizable and liquid MLP; (ii) repurchasing RNF units to capitalize on the severely depressed price (currently a significant discount to the replacement value of its facilities); and (iii) a sale to a strategic acquirer.1  

From October 2012--May 2013, Dolphin III and its outside advisors presented a plan that, in its view, would have efficiently recombined RTK and RNF in a new MLP (the "Dolphin III Plan").  Since then, with RNF down more than 50% and greatly underperforming its peers, lower projected cash distributions, and larger RTK NOL's, the review should also include a re-examination of the Dolphin III Plan.  (The Dolphin III Plan is summarized in the attached addendum.)1   More recently, Dolphin III's outside advisors also identified potential opportunities for RTK and RNF to create value with and without a recombination.

Reasons for Dolphin III's Advocacy
Dolphin III, with the assistance of prominent outside advisors, advocates these positions after 18-months during which it communicated extensively with RTK and its outside advisors as well as consideration given to other facts and developments1

  • RTK's historical business plan has utilized cash distributions from RNF to invest in enterprises unrelated to RTK's core RNF Nitrogen fertilizer business and which, in the aggregate, has generated a sizable cumulative deficit for RTK and reduced value on an absolute and relative basis for RNF holders;2 ,3
  • RNF remains captive inside RTK, which should be resolved to maximize value - the Dolphin III Plan addresses this.  Dolphin believes that greater consideration is required of RNF's relative size (approximately 1.0 million annual metric tons of Ammonia, UAN and liquid and granular Urea - excluding other products and the Pasadena, Texas, Agrifos facility - and an approximate $.9 billion current TEV) to that of its competitors, premium pricing from its mid-corn-belt location and proximity to customers and natural gas.  Resolving the highly inefficient RTK/RNF structure would enhance RNF as an attractive acquisition candidate -- especially to cross-border competitors2;
  • RTK and RNF appear significantly undervalued on absolute and relative terms;
    --Since December 31, 2012, the percentage decline in RNF's total return (unit price plus distributions) -- is approximately (-50%) vs. (-2%) for the average total return of the seven other publicly traded peers.  RNF's percentage decline is over 2 x's that of the next worst performing peer3;
    --RNF's current TEV approximates 50% of the estimated net replacement value of its facilities when certain competitors have indefinitely delayed greenfield projects4, highlighting the acquisition value of existing strategic operating assets;
    -- The pre-tax intrinsic value of RTK's net assets, with RNF units at $16.32 and RTK's other net assets valued at $1.63 per share, is approximately $2.95 per share.  Yesterday, RTK closed at $2.435;
     --The pre-tax intrinsic value of RTK's net assets with RNF units at $30 (a TEV approximating 75% of RNF's estimated net replacement value) is approximately $4.05 per share, more than a 65% increase from yesterday's closing price5.
    --The public analysis provided by RNF for 2014 EBITDA indicated a cash distribution of approximately $2.40 per unit, or over a 14% current yield -- materially greater than any other public sector MLP or corporate peer.3,5

The Dolphin III spokesperson concluded, "RNF does not appear to be large enough to be standalone, but given certain favorable attributes, including the "transportation cost advantage" of its East Dubuque, Illinois facility and current industry and capital market dynamics, Dolphin believes it would be attractive, in particular, to certain domestic and cross-border strategic acquirers.  Utilizing the current implied pre-tax market value of the wood fibre processing businesses in a spin-off, together with the other net assets (approximately $470 million or $1.63 per fully diluted RTK share), an efficient sale of RNF (under the Dolphin III Plan, or an alternative plan) at $30 per unit, would generate total pre-tax value to RTK shareholders of approximately $3.63 per share*, nearly a 50% increase from yesterday's $2.43.  The Dolphin III Plan appears to add over 20% of value to RTK shareholders standalone or in a sale.  Importantly for all RTK shareholders and RNF unit holders, today the Dolphin III Plan may initiate a sale of the recombined entities to a strategic acquirer."

To learn more about the Dolphin III Plan investors may refer to the attached addendum and the contacts below.

Dolphin's private investment entities have an extensive record of working to deliver value for all shareholders and constructively engaging with managements and Boards.  

* 1 RTK = $1.63 of wood fibre spin-off + .0667** of RNF @ $30/unit.
** (34.8 million New RNF units X 55% /287 million fully diluted RTK shares)



  • A $65 million ($0.27 per fully diluted share) special dividend/return of capital6;
  • The separation of RTK's previous alternative energy assets with working capital via a tax-efficient spin-off or rationalization of these assets -- enabling the "right–sizing" of RTK's corporate overhead.  Today, a spin-off or leveraged spin-off of the wood fibre processing businesses in an MLP should be pursued expeditiously (a spin-off avoids the customary IPO discount, underwriting fees and market risk)7; and
  • The efficient recombination of the remainder of RTK (consisting of 23.25 million RNF units, its General Partner and sizable Federal and State NOLs) with RNF by way of a tax-free exchange of RTK shares and RNF public units for units of a substantially more liquid newly established MLP ("New RNF") with enhanced pre-tax distributions per unit.  RTK, with its remaining net assets, would become a wholly-owned subsidiary of New RNF.

Under the Dolphin III Plan, RNF and RTK holders would own approximately 45% (vs. 40.2% today) and 55% (vs.59.8 % today), respectively, of New RNF's 34.8 million fully diluted shares to be outstanding.8 There would be no necessary change in RNF's capital structure or operations, and no change-in-control under the $320 million 6.5% second lien notes due 2021, issued by RNF in April 2013.

Substantial Benefits and Fairness under the Dolphin III Plan for RTK and RNF Holders
Dolphin III and its outside advisors believe that the Plan presented in October 2012 offered substantial benefits to RTK and its holders and was of material benefit to and was eminently fair to RNF and its holders.  Under the Dolphin III Plan, both RTK and RNF holders, through their interests in New RNF, would have received improved pre-tax distributions per unit.  Both RNF and RTK holders would have received a greater after-tax present value upon the sale of their interests in New RNF.  As an additional permanent benefit, a meaningful portion of New RNF's taxable income would have been taxed at the new 23.8% "all-in" individual highest federal income tax rate on qualified dividends vs. the new 43.8% "all-in" federal income tax rate on current ordinary income and cumulative deferred income realized upon the sale of units.

The Key Benefits to RTK and its shareholders were:

  • An approximate 50% aggregate increase in the value of their interests at the then RTK and RNF prices;
  • Efficiently addressing "double taxation" on fully taxable distributions received from RNF once RTK's NOLs were utilized; and
  • Enabling RNF, through New RNF, to be acquired tax free without any significant adverse tax consequences to RTK and its holders.

The Key Benefits to RNF and its unit holders were:

  • A 9% increase in pre-tax distribution per unit at New RNF vs. RNF and an expected corresponding unit price increase;
  • New RNF would have had approximately 34.8 million units outstanding and public float vs. RNF's  15.6 million public float8;
  • New RNF would have owned its General Partner and be controlled by its unit holders; and
  • RTK's control of RNF would no longer impede an acquisition of RNF.

The Dolphin III spokesperson added, "After an extensive review, Dolphin III and its outside advisors, in highly detailed communications, addressed all of RTK's questions and demonstrated that there appear to be no material technical or other defects in the proposed transaction that materially alter its compelling nature, especially after individual federal tax rates for qualified dividends and capital gains were resolved.  Whether examining the transaction on current yield, or pre- and after-tax present values, the Dolphin III proposal showed a significant net increase in total value for RTK holders and real value and material net benefits to RNF holders." 

"This transaction would have efficiently recombined RTK and RNF in a new, substantially more liquid MLP with enhanced distributions and eliminated the RNF control discount.  Today, the transaction appears to improve the attractiveness of RNF as an acquisition candidate when purchasing operating assets in the market appears significantly less expensive than new construction." 

"Further, the Dolphin III Plan was designed when RNF was more than double its current unit price, had substantially greater projected cash distributions and smaller NOL's.  Current facts make the Dolphin III Plan even more compelling.  These value-creating opportunities for RNF are currently impeded as RTK holds 59.8% of RNF and owns its General Partner.  An efficient recombination of RTK and RNF (in a new MLP) provides an opportunity to maximize value for holders of both entities, standalone or in a strategic alternatives process."

1On December 9, 2013, Mosaic Company (NYSE ticker symbol:  MOS) announced a plan to repurchase for approximately $2.0 billion, 43.3 million Class A shares.  On February 11, 2013 MOS announced an additional one billion Class A and Common share buyback in open market and/or private transactions.  Both repurchase plans represented approximately 15% of the total shares outstanding.  In a November, 2013 letter to the RTK Board Chairman, Dolphin advocated the repurchase of up to 15% of its fully diluted shares with the shares trading at approximately $1.75.  RTK did not pursue this proposal.  RTK, in its March, 2013 earnings report, indicated that it had spent approximately $1.0 million on tax and advisory work to evaluate restructuring proposals by shareholders. 
2Although the RNF holdings represented approximately 75% of RTK's pre-tax net asset value, the 18-peers reflected in RTK's 2012 and 2013 proxy statements do not include fertilizer companies.  Here we are specifically referring to RNF's $158 million Agrifos acquisition with $56 million of add on projects and RTK's alternative energy projects.  "From inception on December 18, 1981 through December 31, 2013, we have an accumulated deficit of $385.3 million." (Source:  2013 RTK 10K).  In 2013, 79% of East Dubuque's revenue was sold through a distribution agreement with Agrium expiring in June 30, 2016 with certain renewal options.  Also, 14% of 2014 sales were made directly or indirectly to Agrifos.
3Rentech Nitrogen Partners, L.P. (RNF) has an approximate $700 million market capitalization as compared to its public competitors, whose ticker symbols and approximate equity market capitalizations are as follows:  Yara International (YAR.OL)-U.S. $13.9    billion; CF Industries, Inc. (CF) – $12.6 billion; Terre Nitrogen Company, L.P. (TNH) – $2.7 billion; CVR Partners, L.P. (UAN) –$1.4 billion and net cash flow; Potash Corporation of Saskatchewan, Inc. (POT) – $32.1 billion; The Mosaic Company (MOS) – $19.2 billion; Agrium, Inc. (AGU) – $13.2 billion.  (Source:  Bloomberg.)  On July 29, 2013 a private investment firm announced an unspecified stake in CF causing the shares to initially jump 12%.  The private investment firm advocated a significant increase in the dividend (Source:  Dow Jones).
4On June 2013, YAR.OL announced the deferral of a 1.3 million metric ton Ammonia/Urea expansion project at its Saskatechewan, Canada Belle Plain facility at a cost analysts estimated to be $2 billion (Source:  Reuters); AGU announced a deferral of a $3 billion, 1.8 million ton nitrogen facility in the US Midwest, citing increasing construction costs and pricing concerns (Source:Bloomberg). In August, 2012 RTK/RNF senior management indicated that RNF had an approximate $1.5 billion replacement value before its $97.8 million expansion project and the November 2012 Agrifos acquisition for approximately $158 million plus $56 million of add on investments. 
5Prior to the issuance of $100 million of 4 ½% preferred shares convertible into approximately 45.0 million shares or 16.5% of the fully diluted   shares, there were approximately 242 million fully diluted shares (TSM-at RTK share prices between $2.60-$3.65 (227.5 million shares outstanding, 3.5 million options @$1.59, plus 1.3 million warrants @$.57 and 11.3 million RSU's and PSU's (Source:  RTK 2013 10K), and an estimated $175 million of net other assets:  the investment in the wood fibre processing business of $125.5 million (May 2, 2013 Investor Presentation) $22 million of projected of 2014 EBITDA after $15.0 million of unallocated cash corporate overhead; $136.1 million Federal NOL, X35% (Source:  March 11, 2014 Earnings Report).  However, the 2013 RTK 10K suggests that the cost of the wood fibre and pellet businesses will be approximately $157 million.  On May 1, 2014 RTK announced the acquisition of New England Wood Pellet for approximately $45.1 million including assumed debt.  On June 16, 2014, RTK announced a series of long-term processing agreements with subsidiaries in Chile for $8.6 million.  The RNF units held by RTK have no tax basis (April 2012 investor presentation).  On February 12, 2014, RNF issued a public announcement with 2014 EBITDA sensitivity analysis prepared by a third party consulting firm.  The base case indicated $123.1 million in EBITDA.  A prominent sell side research firm indicated that the "base case" yields annual cash distribution of $2.43 per unit before any replacement of a working capital reserve of $.20-$.40/unit.  On February 13, 2014, RNF indicated that it was not providing guidance on cash distributions per unit until later in 2014.  No distribution update was provided with RNF's March 11, 2014 earnings report.
6In December, 2012 RTK distributed $.19/outstanding share ($42.5 million) in a dividend/return of capital.
7These assets previously included a significant amount of net cash, as well as remaining alternative energy assets.  RTK's substantial net cash was subsequently deployed in the wood fiber processing businesses.  Natchez was sold for $9 million in August, 2013.  In March, 2014 the alternative energy technologies and the PDU were sold for $15.3 million plus $16.2 million upon the successful redeployment and startup of the PDU less $5.1 million of transaction expenses.  On September 23, 2013, RTK obtained a $100 million three-year revolving loan facility initially secured by 15.4 million RNF units and, under certain circumstances, up to 19.4 million units.  On April 9, 2014, RTK announced a new $50 million term loan to replace the outstanding balance on the term facility.  In addition, a $100 million of preferred stock convertible into approximately 45.0 million shares (convertible at $2.22) was added.  On February 13, 2014, RTK announced "the continuation of its announced strategy to expand the wood fibre processing businesses and progress toward a potential IPO as an MLP in less than two years for this business.  In its March 11, 2013 earnings reports, RTK provided 2014 guidance of $22 million of EBITDA after $15.0 million of unallocated cash – corporate overhead."
8RNF currently has a 15.6 million public float with approximately 39.0 million fully diluted units outstanding.



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