Des Moines Register
05-27-07
Ethanol firm climbs for clout through multiple footholds
D.M.-based business's plan also strives to shield small producers in face of potential surplus
By JERRY PERKINS
REGISTER FARM EDITOR
Countryside Renewable Energy, a Des Moines-based, privately owned company formed last year by venture capitalist John Pappajohn, is still looking to become a major player in the brave new world of ethanol.
The company, financed by Pappajohn and other investors, aims to buy equity positions of less than 10 percent in a number of smaller, independent ethanol producers, mostly locally and farmer-owned companies with a single plant, said
David Miles, chief financial officer of Countryside.
By pulling many of the smaller, independent ethanol plants under the umbrella of a public company, Miles said, Countryside will give farmers and other local investors a way to stay in the ethanol industry rather than sell out to a big company.
"The small guys need to come together so they can grow and compete," Miles said. "It's an alternative between going it alone and selling out."
By merging several small ethanol producers into a larger entity, the little guys will have increased clout in an industry that is increasingly becoming dominated by bigger companies, Miles said.
Pappajohn is a legendary venture capitalist whose fortune has been estimated in the hundreds of millions of dollars.
"John Pappajohn is the lead investor, and there are some others," Miles said. "I can't say a lot about the capital, but John has invested a meaningful amount. I can't say what it is, but he's put real money into this."
Stephanie Moline, vice president in charge of corporate banking at First National
Bank of Omaha, said a couple of groups like Pappajohn's want to aggregate smaller plants so they can compete with the big fish swimming in the ethanol pool.
"It's a hard sell," Moline said. "The market is not hot for initial public offerings in ethanol right now."

That could change if the price of gasoline keeps hitting record levels and increasing talk in Washington, D.C., about raising subsidies for ethanol, Moline said.
"Like everything else, it all depends on the timing," she said.
Chad Hart, an agricultural economist who heads the biorenewables policy division at the Center for Agriculture and Rural Development at Iowa State
University , said consolidation in the ethanol industry is still two to three years away, but there are signs it is starting.
Local investor- and farmer-owned ethanol plants used to make up half of Iowa's ethanol industry, he said, adding that it's no longer true.
A Des Moines Sunday Register analysis of Iowa's ethanol ownership shows that
57 percent of the state's ethanol plants are controlled by out-of-state or foreign investors.
Most of the ethanol industry's expansion is coming from large companies, Hart said, like publicly traded VeraSun Energy Corp. and U.S. BioEnergy Corp., and privately owned Poet, formerly known as Broin Cos.
With the exception of Australia-based Global Ethanol buying a controlling interest in Midwest Grain Processors last year, no Iowa ethanol plants have been sold,
Hart said.
"It really is a matter of farmers getting a bidding price for their companies that makes sense," Hart said. "Then you might see some sales."
Uncertainty about the future growth of the ethanol industry adds risk, he said, and the smaller, farmer-owned plants might need more outside help marketing their ethanol.
"Firms like Countryside can create a better marketing plan for farmer-owned ethanol plants by pooling their resources for sale," Hart said. "Oil companies will be more interested in filling all their ethanol needs by contracting with one entity rather than 10 separate companies."
Miles and Countryside President Mark Rosenbury said they have talked with about two dozen ethanol companies about the Countryside plan.
"These are serious talks," Miles said.
Countryside's goal is to become a publicly traded company, Miles said.

The company intended to go public last year, but a downturn in the ethanol industry last August and September persuaded the company to pull back.
"It looked like there might be a chance to take the company public ... but corn prices soared and ethanol prices fell," Miles said. "The market was not, and still is not, as accepting of ethanol as it was."
These days, Countryside's strategy is to talk mostly with ethanol companies formed by farmers and other local investors who own just one plant.
Countryside plans to take a relatively small equity position in those companies, with equity swaps plus some cash from Countryside to sweeten the deal.
Miles stressed that Countryside's investment in an ethanol plant shouldn't be seen as a hostile takeover.
"This is being built for farmers," he said. "If we go public, farmers will still own more than 50 percent of the company."
The Pappajohn group intends to make money, Miles said.
"John Pappajohn has taken 40 to 50 companies public and he has the connections on Wall Street and the financing expertise," Miles said. "And for that, there will be compensation."
Miles and Rosenbury have incentives in their salaries to put the deals together and bring more ethanol plants into the fold.
"By creating this larger entity, we will increase the value of the individual ethanol companies by more than the compensation paid to the Pappajohn group," Miles said.
Miles said Countryside's plan spreads risk in the increasingly risky ethanol industry.
Instead of five plants owning 100 percent of each of their plants, Miles said, those five plants could have the alternative of owning a 20 percent stake in a five-plant company.
"The immediate benefit is that the ethanol plant investors could take some cash off the table and reduce their risk of being single-plant owners," Miles said. "They also benefit by approaching the market as one bigger entity. And when the company goes public, they will have easily marketable shares that they can sell when they are a publicly traded company."

Consolidation of the ethanol industry is coming, Miles said, fueled by profit margins that are a fraction of what they were less than a year ago because of higher corn prices and lower ethanol prices.
A glut of ethanol will hit soon, he said, as more ethanol plants come on line in the near future.
Industry experts say ethanol production capacity will grow from 6.3 billion gallons at the end of last year to 9.5 billion gallons by the end of this year, Miles said. By the end of 2008, estimates are that yearly ethanol production will hit 13.8 billion gallons.
Such a glut would threaten the industry at a time when additional capital will be needed for new technology and to build larger plants, which are becoming the norm.
"By this fall or the end of the year, the industry will anticipate that surplus ethanol," Miles said. "We think there will be so much ethanol coming on line that supply will exceed demand and the price will have to come down for ethanol."
When that happens, the shakeout of the ethanol industry will start and the smaller ethanol producers will be the first to feel the pinch. And that's when it will pay to become part of a larger whole, Miles said.
Who's who at Countryside Renewable Energy
ADDRESS: 218 Sixth Ave., Suite 500, Des Moines, IA 50309-4010
PHONE: (515) 243-5012
JOHN PAPPAJOHN, 78, the principal investor, is a venture capitalist whose fortune has been estimated to be more than $500 million.
The son of Greek immigrants, he and his brother, Aristotle, started an insurance agency in Mason City and ran the family's grocery.
Pappajohn went on to found Guardsman Life Insurance Co. and, after selling the company, became a venture capitalist at age 41 with $100,000.
Pappajohn eventually helped start more than 50 health care companies, bought and sold agribusinesses and made his first million in 1972 when he took Kay
Laboratories, a struggling San Diego company, public and then helped sell the company 10 years later.

He went on to specialize in health care financing and developed a reputation for ethical behavior.
In the mid-1990s, he turned to promoting entrepreneurship and, with his own money, created five entrepreneurial centers in Iowa City, Ames, Cedar Falls, Des
Moines and Mason City.
Pappajohn has increasingly turned his attention to becoming a philanthropist with his wife, Mary.
They have given to the University of Iowa; to Pappajohn Entrepreneurial
Centers at Iowa State University in Ames , Drake University in Des Moines and
North Iowa Area Community College in Mason City; and the John Pappajohn
Higher Education Center in Des Moines, a 35,000-square-foot building that provides classrooms for Iowa colleges and Des Moines schools.
Also, the Pappajohns will donate their collection of outdoor sculptures - valued at
$20 million to $30 million - to the Des Moines Art Center for installation in the downtown Western Gateway Park.
DAVID MILES, 50, chief financial officer, had a 20-year career in the investment business, including being president and principal owner of Investors
Management Group.
He joined the Iowa Board of Regents in May and was elected president pro tem.
He served 11 years on the Drake University Board of Trustees, including three years as chairman.
A native of Charles City, he received a law degree from Harvard Law School and a master's degree in public policy from the John F. Kennedy School of
Government at Harvard in 1983.
He has a bachelor's degree in public administration from Drake University.
MARK ROSENBURY, 60, president, was senior vice president and chief administrative officer at Terra Industries Inc. from 1987 to 2000, where his duties included leading investor and government relations, human resources, risk management and information technology.
Before joining Terra, he was an auditor with Price Waterhouse and a financial executive with an international electrical component manufacturer.
He grew up in El Paso, Ill., and earned a bachelor's degree in business and economics in 1969 from Manchester College in North Manchester, Ind.

Farm Editor Jerry Perkins can be reached at (515) 284-8456 or jperkins@dmreg.com