StockTalk:
TMF Interview With AgriBioTech President & CEO Johnny Thomas
With Yi-Hsin Chang (TMF Puck)
and Brian Graney (TMF Panic)

June 10, 1998

Hello and welcome to another edition of StockTalk with Brian Graney and Yi-Hsin Chang. Joining us today is Dr. Johnny Thomas, president and CEO of AgriBioTech Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABTX)") else Response.Write("(Nasdaq: ABTX)") end if %>. The Las Vegas, Nev.-based company is a large player in the $1.1 billion forage and turf seed industry in the U.S. The company operates proprietary turfgrass and alfalfa seed development and breeding programs, seed processing plants, and a sales distribution network reaching 48 states and 51 countries. Shares of AgriBioTech have risen nearly 50% since the beginning of the year.

TMF: Thank you for talking with us, Dr. Thomas.

Thomas: Thank you very much. It's a pleasure to be here.

TMF: Your company has grown considerably on a revenue basis over the past 12 to 18 months mainly through acquisitions. Do you see more acquisitions down the road for your company, and if so, what makes a company an attractive acquisition candidate in your eyes?

Thomas: We will continue to acquire. Our original goal was to acquire $500 million in annualized revenues as a starting point, and we're two years ahead of schedule, so we will continue to acquire. We are looking for additional acquisition candidates that are strong in either distribution or germplasm, which means a research company, and we will be buying a little more production just to keep that in balance with our overall market share.

TMF: On your website, you mention achieving a goal of 45% market share. How big is your market share now, and how, specifically, do you envision reaching that goal in the next year or so?

Thomas: We've grown from zero 3 1/2 years ago to about a 35% market share in our sector right now. I believe that based upon the number of negotiations we have going forward, we should achieve that 45% market share by December 31 of this year, which will be two years ahead of what we originally set out as our target.

"...we should achieve that 45% market share by December 31 of this year, which will be two years ahead of what we originally set out as our target."

TMF: Those negotiations are with other acquisition companies?

Thomas: Yes. They're with companies that are part of the traditional Mom & Pop base out there. We have been consolidating, and now that we have this level of credibility, there are more people who want to join the ABT family.

TMF: What kind of thresholds do you use when you look into acquisitions? Do you look at sales?

Thomas: Well, we don't necessarily have a sales quota for it. It's more what it takes to fill in the niches in market share. For example, if we don't feel we have our market share in the state of Wisconsin, then we would look for more companies that sell in Wisconsin. On the research side, you can't have too much research with all the changes we are going to make, so we would take almost any research company provided they had a fair valuation.

TMF: Following Monsanto's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> acquisitions of Delta & Pine Land <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLP)") else Response.Write("(NYSE: DLP)") end if %> and DeKalb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DKB)") else Response.Write("(NYSE: DKB)") end if %>, Dow Jones Newswire quoted your vice president, John Francis, as saying, "It's no longer a matter of if but of when and how much," when talking about AgriBioTech being acquired by another company. Is that true? And do you expect a merger announcement any time soon?

Thomas: Obviously we are in an area that one has to be careful about speculating on. Let me just say that when I started this vision 3 1/2 years ago, I thought the other sectors were already consolidated. So I've been surprised a little bit by the aggressive role of Monsanto and DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> buying an equity stake in Pioneer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHB)") else Response.Write("(NYSE: PHB)") end if %>, and Dow <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DOW)") else Response.Write("(NYSE: DOW)") end if %> buying an equity stake in Mycogen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MYCO)") else Response.Write("(Nasdaq: MYCO)") end if %>. It has surprised me that the industry is apparently going to consolidate much more than I originally realized. It's easy to see why John said what he said because we are the only significant-sized seed company out there that does not have an equity stake by these pharmaceutical, big chemical company players.

Our goal was to make ourselves a mirror-image of these other companies. Therefore, I cannot imagine at some point in time that that would not be the right thing to do, and I cannot imagine how they will ignore the second-largest seed market in the world, so I believe that that is a likely consequence at some point in the future. I would, however, caution shareholders that my goal has always been to build franchise value, and that's to increase the industry-leading market share, to increase the research, and to bring in a team to make us the mirror-image of these other companies.

We can do the final stages of the consolidation better than these other companies, so I can't imagine that they would want to own us 100%, certainly, until we finish that. We have a more professional staff to integrate these companies into one smooth operation that is ABT instead of a conglomerate of 30 individual companies going their own way.

We still have some work to do, so that even if they came to me today, I would fight them off because my job is to delay them [from] buying us as long as possible while I build franchise value. I would have no comment that would imply that we are on the [selling] block at this point in time. We are a public company, if it is their strategy to buy us at some point -- you've got what are called hostiles and friendly associations -- I can't speak for what they might do.

TMF: Some analysts compared AgriBioTech with DeKalb and Delta & Pine Land when talking about revenue multiples. Is that really a fair comparison?

"I would have no comment that would imply that we are on the [selling] block at this point in time."

Thomas: I believe that is the fair comparison. I believe, as long as you have the underlying things such as the germplasm and the management team, that these companies are being bought on a revenue basis because it really represents their share of the marketplace.

You need to remember that Monsanto and DuPont are not buying these companies for what they look like today. They are buying them for the value that's going to come out over the next 10 years by inserting additional genes into the superior base that these companies own. And you've got to have that base of genetics. You've got to have access to customers.

So yes, that is what they're buying on and if you make those comparisons even after today's run-up -- I'm not sure, we're probably two times revenues -- these people were bought at over seven times revenues. It's my conclusion that I need to continue to build franchise value while we get our fair valuation in the marketplace.

TMF: Many of the companies you've been acquiring of late have been distribution companies, which tend to have lower margins, and other competitors, such as DeKalb, have more diversified product lines that includes seeds for food crops. That's what we're getting at as far as comparing you directly.

Thomas: We have a more diverse product line than they do, so it's not diversity. They actually are very focused. Pioneer gets almost all of their revenue from corn, [or did] until fairly recently. They have a forage division, but it's only about $60 million out of their $1.7 billion [in annual revenues], and soybeans are starting to play a part. So they are actually more specialized. What they are interested in is making dollars, and they are interested in serving the customers, and forage -- hay -- is the third leading cash crop in the United States. Our markets are four times bigger than the cotton markets. So if you want to try and imply that our crops are not as economically important, that's just not going to hold weight.

We have a larger market. There are more acres of forages in the country than there are of corn -- by far, if you include those that are grazed and you sell the product as milk or meat. You have to understand that forages are about 80% of the diet that beef animals eat in converting this to steaks for your plate, or that dairy animals eat in converting that to milk for your glass or to cheese for your pizza.

Forages are not some little, obscure crop just because there's no commodity market and there were no large companies in the sector so it was undiscovered by the financial community -- that doesn't make it a minor crop. The realities are that it is a very significant crop, as are turfs. There are 25 million acres of turf grasses and home lawns in this country. That is about double the acres of cotton in this country. So any implication that those acres are not significant to these kinds of players in the marketplace, I would take strong exception to.

TMF: Can we assume that there are no plans from AgriBioTech's point of view to expand or diversify into corn or soybeans or the other crops that you mentioned?

"Forage -- hay -- is the third leading cash crop in the United States. Our markets are four times bigger than the cotton markets."

Thomas: Well, we actually sell some of these other crops. They are what we call ancillary crops. In other words, we are focused on being No. 1 in forage and turf, just like Pioneer is focused on being No. 1 in corn, but they sell a little alfalfa as an ancillary crop. We sell Roundup Ready soybeans, for example. If we are going to offer our customers soybeans, we have to have state of the art [seeds]. We are introducing Bt corn and Roundup Ready corn over the next 12 to 18 months. So we supply those to our customers, but they are just not our core business.

TMF: Are you focusing more on biotechnology to develop proprietary seeds on your own?

Thomas: We are increasing our traditional program, but I hired Tom Rice -- who was the original visionary at Pfizer [the seed unit of the drug company], which was acquired by DeKalb -- for Bt corn, and he's the one who followed that program through from conception to finalization over a 15-year period. I hired him to make me No. 1 in this sector, a sector that's largely ignored. And yes, we are actively negotiating for genes, and yes, we have made arrangements to do all of our own transfers-in of genes, if that's what needs to be done. We want to partner with some of the big players if the terms are fair and acceptable. We are also prepared to make ourselves a force in our sector in our own right.

TMF: Just one last question, actually touching back on acquisitions and you being an acquisition target. Up to this point, have you been approached by any companies as far as being acquired by them?

Thomas: I have been approached for partial equity in the past. I have turned that down.

TMF: I'm afraid that's all the time we have, but I'd like to thank you, Dr. Thomas, for sitting down and talking with us today.

Thomas: Thank you. I appreciate the opportunity to communicate with shareholders.

TMF: We'll be back with another edition of StockTalk next week.

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