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Crop Firm Ends in Acquisition

After pivoting from the biofuel industry to the forage seed sector, Ceres Inc. of Thousand Oaks has found an acquirer in agricultural giant Land O’Lakes Inc. The Arden Hills, Minn. co-op, best known for its dairy products, will pay about $17.2 million in an all-cash transaction to buy all outstanding shares of Ceres common stock for 40 cents a share, representing an 81 percent premium of its June 16 closing price. Assuming the deal goes through, Ceres will become a wholly-owned subsidiary of Land O’Lakes, complementing its other forage seed business Forage Genetics International, which focuses on alfalfa seed production. The seeds are used to create nutritious plants for livestock to eat. Ceres’ seed and trait technology will be used to further advance Forage Genetics’ research and development pipeline, allowing Land O’Lakes to offer its customers more forage seed products, including forage sorghum and sorghum-sudangrass hybrids. The acquisition is expected to close in the third quarter of this year. “Our shift away from bioenergy and Brazil and into forages has been highly successful to date, and is culminating now in this proposed merger transaction with a preeminent leader in forage crops,” Ceres’ Chief Executive Richard Hamilton said in a statement. “After evaluating strategic options, our board of directors has unanimously determined that this all-cash transaction, which represents a significant premium from recent trading levels, is in the best interest of the company and its stockholders, and will advance Ceres’ mission of making the production of meat and dairy more scalable and sustainable.” Ceres did not respond to request for comment, and Land O’Lakes declined to comment on the deal. Biofuel days In February 2012, Ceres held its initial public offering of 5 million shares at $13 a share. Soon after, its stock price soared, peaking at $134 a share that April but quickly declining thereafter. The company’s initial focus was on biofuel production, particularly turning sorghum into ethanol, which the company marketed to Brazilian growers for ethanol mills. Oil was trading for more than $100 a barrel in 2014 but began declining as domestic oil production increased, attributed to hydraulic fracturing technology and the oversupply of Saudi Arabian production. As oil prices fell, it made alternative energy sources such as biofuels less attractive due to their high costs of production. In March 2015, Ceres signed a multi-year agreement with Brazilian energy company Raízen, a joint venture of Royal Dutch Shell of the Netherlands and Cosan of São Paulo, Brazil, to produce sweet sorghum on an industrial scale to market to Brazilian ethanol mills. As the world’s largest sugarcane ethanol producer, Brazil has replaced a significant amount of its gas needs with sugarcane ethanol. However, low oil prices also affected the ethanol industry, making the alternative much less competitive in pricing. In response, a few months later, Ceres announced its continued realignment to focus on forage sorghum and biotech traits for sugarcane, rice and other crops. The company cited Brazil’s economic challenges with ethanol as well as the overall global energy market as reasons for its strategic shift into agricultural technologies. Dan Putnam, an agronomist and expert on alfalfa and forage at the University of California, Davis, who is familiar with the deal and the work of both Ceres and Land O’Lakes said the move from biofuels into forage was a natural transition. “They (Ceres) worked on biofuels, but many of the traits we are looking for in forage crops are also important in biofuels,” he said. “There is a confluence between the biofuels and forage crop concepts.” Drought-resistant crops Forage crops, or plant species grown for livestock feed, need many of the same genetic traits as biofuel crops, such as drought resistance, disease resistance and higher yields. “The forage market is highly complementary to our existing technology and hybrid development programs,” Walter Nelson, Ceres’ vice president of product development, said in a statement. “Based on results from our pipeline, we believe we can substantially improve the nutritional quality and digestibility of forage sorghum.” Over the past year, Ceres has introduced a slew of seed and trait products, including new forage sorghum hybrids with the highest milk yield per acre; a soybean gene, which it patented and licenses to other companies; as well as corn traits for improved digestibility, drought tolerance and insect resistance. Nevertheless, though much of last year, Ceres stock traded dangerously close to the $1 minimum threshold to stay on the Nasdaq. By the end of 2015, it fell below $1 and was at 22 cents the day before the acquisition announcement. Ben Kuo, founder and editor of technology news website SocalTech.com, who has followed Ceres through the years, believes the acquisition had more to do with Ceres’ technology than anything. “The one thing Ceres does that is definitely spot-on with Land O’Lakes is their focus on drought-tolerant crops, which is similar to what Forage Genetics does with alfalfa,” he said. “It looks to me like it was a technology acquisition. Land O’Lakes is really looking to bolster their technology, their understanding of genetics and the talent related to it.” With net sales of $13 billion in 2015, Land O’Lakes is one of the largest agricultural co-ops in the United States with more than 3,000 dairy and agricultural farmers. Forage Genetics International, its forage seed subsidiary, is the world’s largest producer and processor of alfalfa seeds. Some of its products include HarvXtra Alfalfa, which increases harvest flexibility, as well as nematode-resistant and salt-tolerant alfalfas. Ceres markets and sells its seed offerings under its Blade seed brand and also licenses its biotech traits and technology to other organizations. In 2015, the company operated at a net loss of over $28 million with product sales at a mere $434,000. With such weak performance, intellectual property emerged as the company’s main asset. Ceres currently has about 90 issued patents with additional patents pending. Greg Lampert, an intellectual property attorney for Lewis Roca Rothgerber Christie in Glendale said how important it is to patent intellectual property early on to recoup research and development costs and prevent competition from entering the market. “If you come up with something, if you’ve genetically modified or asexually reproduced a plant, you have to protect that right away, because once it is out there for a year, you wave your patent rights,” he said. SocalTech’s Kuo believes intellectual property is especially important in the agricultural industry and despite Ceres’ negative financial results, that’s what closed the deal. “As much as you can own your IP (intellectual property) in this area (agriculture), the better it has been,” he said. “Owning rather than licensing is probably going to be a lot better for Land O’Lakes.”

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