Industry Case: Agricultural Commodities Company
Review of Financial Obligations Prior to Industry Roll-up Acquisition

In late 2007, GaiaTech was retained by a leading asset management and hedge fund management firm specializing in energy and commodities markets to conduct an environmental review of the trading and merchandising divisions of a Fortune 500 agricultural feed stock and fertilizer company.

Our review was intended to assist the buyer in understanding potential environment issues before it finalized the acquisition of the company, which transaction was valued in excess of $2 billion.

The target company's operations were divided into two business units – an agricultural unit focused on grain distribution and sourcing, grain, animal, and oil seed by-products, and agricultural trading, and an energy unit focused on fertilizer formulation and energy trading. The company operated 167 locations across the country, and had potential environmental liabilities at all locations.

At the client's direction, GaiaTech sought to cost-effectively identify and monetize any significant environmental impact or compliance concerns associated with those 167 operating facilities. Our scope consisted of management interviews, site inspections and compliance evaluations at a 10% sampling of the facilities, a review of environmental database reports and readily available historical sources for one-fifth of the facilities, and a review of aerial photography and proprietary environmental database information for all remaining locations.

Given the importance of maintaining confidentiality with regards to our client's planned investment, our engagement terms included strict confidentiality about the deal, and required that we complete our work extremely quickly with minimal disruption to the operating business, despite having limited access to knowledgeable environmental or managerial personnel at the target.

To estimate the costs of resolving known environmental issues and investigating unknown but potential issues, GaiaTech conducted a “cost-to-cure” evaluation, relying on probability analysis to model potential costs for identified known and potential environmental matters at a subset of the sites. GaiaTech then performed a Monte Carlo analysis to extrapolate costs across the company's portfolio of properties, and modified the findings based on each particular site's operational profile.

GaiaTech's review was summarized in a concise deal review document with supporting site profile, cost-to-cure, and cash-flow tables. The document was distributed to the lending syndicate, was reviewed and accepted by the bank group, and the deal closed successfully in early 2008. Environmental issues were effectively rendered a non-issue in the transaction, given the context that GaiaTech was able to provide; our report then served as a basis for implementing a proposed Environmental Business Operating System that addressed environmental issues after the transaction close.