EarthShell IPO: Will Investors Contain Their Enthusiasm?
EarthShell Container Corp. is going to Wall Street with what could be a revolutionary product--a biodegradable material that it claims will replace polystyrene foam.
If the product does everything the Santa Barbara company says it can--and some backers are already comparing its significance to the invention of plastic--investors may be eager to get a piece of EarthShell’s $250-million initial public offering.
Expected to be sold by April, EarthShell’s deal would be the largest first-time sale of stock to the public by a California company so far this year.
Made from biodegradable raw materials such as limestone, recycled potato starch and water, EarthShell’s new product could redefine the $8-billion domestic market for disposable fast-food containers.
“It’s a damn miracle,” said Steve Andersen, a senior manager with the Environmental Protection Agency who specializes in ozone protection and served on a working group that analyzed EarthShell’s new material.
“It shows great promise and has global potential,” said Andersen, who keeps an EarthShell cup on his desk and predicted it would create a challenge other companies will scramble to match.
Fast-food giant McDonald’s Corp. recently approved EarthShell for use.
However, some investors are on the fence, pointing to a high market valuation of nearly $2 billion for a fledgling company with no revenue that has lost almost $75 million since it was formed in 1991.
“It’s very uncommon to see a developmental-stage company being valued this highly. It’s very speculative,” said Ryan Jacob, director of research for IPO Value Monitor in New York. “Still, if it all pans out, it could be very promising.”
Polystyrene foam has long been a target of environmentalists, not only as a symbol of wasteful consumption and a source of litter, but as filler in dumps.
Makers of the foam have adopted significant new recycling methods in recent years.
“Today’s polystyrene is made from a lot less material and is much more environmentally friendly,” said Mike Levy, executive director of the Polystyrene Packaging Council, a trade group in Washington, D.C. Levy said he couldn’t comment on EarthShell’s product.
Still, by contrast, EarthShell’s product can be made with little energy and with plentiful biodegradable resources, Andersen said.
“Finally, fast-food packaging that Mother Earth can love,” said Essam Khashoggi, chairman of the board, in the company’s offering documents.
“It will biodegrade in an hour, just like they say,” said Bob Sulnick, co-founder of American Oceans Campaign, a nonprofit environmental group that has been involved with the product for nearly four years.
The product isn’t the only thing that’s unusual about EarthShell.
Khashoggi, 58, who is both owner and chairman of the company, is the younger brother of Adnan Khashoggi, a key middleman in secret White House arms sales to Iran during 1985-86.
Adnan, once described as one of the world’s richest men, has no involvement with EarthShell, said those familiar with the company.
“Not directly; not indirectly. There is no involvement by Adnan,” said John Daoud, chief financial officer of E. Khashoggi Industries. “Not any single business in 10 years. They are brothers, yes, but that’s their only relation.”
During the 1980s, however, the brothers co-owned companies, shell companies and offshore companies with ownership structures so complicated that even an experienced Bankruptcy Court examiner found them hard to unravel.
In 1988, the Salt Lake City holding company Triad America Corp., owned about 80% indirectly by Adnan Khashoggi and the rest indirectly by Essam Khashoggi, and eight affiliated companies filed for protection under Chapter 11 of the U.S. Bankruptcy Code, listing liabilities of $197 million and assets of about $9 million.
At the time, bankruptcy examiner Leonard L. Gumport found more than 40 corporations affiliated with the Khashoggi brothers.
Essam Khashoggi, through his EKI, holds most of the patents on EarthShell’s products. Even after the public stock offering, Essam would still own about 73% of EarthShell company documents state.
EarthShell plans to sell 13.2 million shares at $19 a share, and would use $36.9 million to repay loans from EKI. Nearly $63 million of proceeds would be used for development of new products, according to offering documents.
EarthShell, behaving like many start-ups, hasn’t posted a profit or any sales since its creation six years ago. It won’t even begin to post any revenue for 15 more months, company documents say.
EarthShell executives and investment bankers at Salomon Smith Barney and C.S. First Boston Corp. underwriting the offering could not talk about the company because of securities laws against discussing a company’s stock before it’s sold for the first time.
EarthShell first filed for permission to go public in October 1996, but the company postponed its stock sale because of continued meetings with environmentalists and potential buyers, such as McDonald’s. Typically, a company goes public within a few months of its filing date.
“They are striking with an iron that is quite cold,” said David Menlow, president of IPO Financial, an IPO data company in Springfield, N.J. “It will need to develop over time--and hopefully over less time than it took to get this deal on the board.”
Part of the delay was simply negotiating with McDonald’s to approve EarthShell for its restaurants. One of the McDonald’s suppliers has now agreed to purchase 1.8 billion EarthShell Big Mac sandwich containers during the next three years. Mass manufacturing hasn’t begun yet, but EarthShell has licensed Sweetheart Container Corp. to make the EarthShell products.
“EarthShell seems to be cost-competitive. And it’s solid, durable for Big Mac and will keep our flagship sandwich hot,” said Walt Riker, spokesman for McDonald’s. “Thirdly, we think it’s intriguing environmentally, so we’ll just see.”
EarthShell executives are currently on a roadshow pitching the deal to investors. The deal is scheduled to be sold the week of March 23.
The Khashoggis also could not be reached for comment.
Although Essam Khashoggi has a much lower profile than his brother, he moves in the same circles of the wealthy elite. He lives in an oceanfront estate in Santa Barbara in the exclusive Hope Ranch area.
Adnan Khashoggi, who now lives in Saudi Arabia, was acquitted of charges that he helped former Philippine First Lady Imelda Marcos hide ownership of assets.
