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SANW: S&W Seed to acquire Du Pont Pioneer alfalfa operations and become the sole supplier of alfalfa seed to Du Pont Pioneer. Expected 2015 FY sales from these operations is $25 million with $40 million in 2016


By Ian Gilson, PhD, CFA


S&W Seed (NASDAQ:SANW) announced on December 19, 2014 that it will acquire the alfalfa operations of Du Pont Pioneer. We assume that this is the result of the resumption of the talks that ended in October, 2014. 

The stock reacted strongly to the news in after-market trading and closed up 25% for the day. 

We have made certain assumptions on how the company will finance the cash portion of the deal. These are unlikely to be precise. We are also assuming a quarterly distribution of revenue from the acquisition. These are our assumptions made without any guidance from the company and will be changed as we obtain more information. 

S&W Seed will purchase all of Pioneer's non-GMO alfalfa operations, assets and research facilities. This includes 31 current employees. The cost is $27 million in cash on signing, a $10 million promissory note at 3% interest and $5 million earn-out payable in 3 years. The company will also buy the GMO alfalfa germplasm developed for extending their sales, these apart from those developed by S&W Seed for its varieties, subject to certain (not specified) conditions for $7 million at the end of 2017.

We are assuming that the $27 million in cash will come from borrowings of $14 million at 4% per year plus $16 million from the sale of equity (or its equivalent such as a convertible) at $4 a share, adding 4 million shares to shares outstanding. Again, this is our current assumption and this will change as more information becomes available. 

The deal includes over 15 seed varieties on the market that generate about $40 million a year in revenue. There are over 60 varieties in development. A seed cleaning and production facility in Idaho is included, which means that S&W Seed now has access to three seed cleaning facilities. There are research facilities in Wisconsin.

Du Pont Pioneer will continue to sell alfalfa seeds through its own sales representatives but they will now be produced by S&W Seed under a ten year exclusive arrangement. It is possible that S&W Seed can leverage its own varieties by selling those to Pioneer. 

We do not know how Pioneer obtained its seed. It is probably through contract growers since no land is included in the deal. Some of the seed varieties may thrive in either the Sam Joaquin or the Imperial valleys, which could well leverage earnings in the future.


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