Jeff Ubben’s ValueAct increases its bet on an unusual environmental play

• Business: Enviva is a supplier of utility-grade wood pellets to power generators. The company procures wood fiber and processes it into utility-grade wood pellets and loads the finished wood pellets into railcars, trucks and barges that are transported to deep-water marine terminals, where they are received, stored and loaded onto oceangoing vessels for transport to the company’s principally Northern European customers.
• Stock Market Value: $1.2 billion ($34.37 per share)

• Percentage Ownership: 7.52%
• Average Cost: $29.03
• Activist Commentary: The ValueAct Spring Fund was launched in January 2018 with the mission of identifying and investing in companies whose products, services or technology can unlock environmental or social value, which in turn creates a sustainability premium. ValueAct is building a huge network and has accessed experts in industries such as energy, electrification, water, agriculture, food production, particulates, education and human rights. Just like ValueAct’s constructive, patient investment style, the ValueAct Spring Fund will seek to earn the trust of managers, board members and institutional investors. Jeff Ubben serves as the portfolio manager and Eva Zlotnicka serves as vice president. Eva has a pre-existing relationship with ValueAct through their interactions with Morgan Stanley, where she served as a VP and US lead for the Global Sustainability Research Team. At Morgan Stanley, she worked to help address and raise awareness of environmental and social issues both inside and outside of corporations.

On February 14, 2020, ValueAct filed a passive 13G reporting a 6.3% position. On June 5, 2020 they converted that 13G filing to an active 13D filing and reported ownership of 7.52%. Enviva is now a core position in the Spring Fund.

On May 10, 2018, ValueAct first announced that it acquired a $20 million stake in Enviva Partners LP, making the investment through its ESG-focused ValueAct Spring Fund.

Enviva manufacturers wood pellet plants in the southeastern part of the U.S. from tree farm scraps and pulp mill waste. These pellets are sold to power generators in Europe and Japan as they convert coal plants to biomass. This technology reduces the carbon footprint of these plants by roughly 80%, making it a key part of the decarbonization strategy for utilities. By working closely with the independent stewardship organizations, Enviva helps assure that the tree farms are managed responsibly. The extra income the landowner receives from Enviva helps replace lost business from pulp mills, protecting the land from development.

The company’s strategic access to so much forest growth is key to securing a contracted revenue backlog of over $10 billion, with a contract maturity of over 11 years. Enviva has refined its technology to raise the burning temperature of pellets, enabling them to produce more energy. The company has also slashed costs by building facilities close to logging sites where it can collect scraps that sawmills cannot use. Enviva’s targeted return is 15%, with a current yield of 7.5% and a growth in distributions of 8%.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio Manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.