Des Moines Register
10-24-07
Pappajohn jumps ship as ethanol market lags
The businessman has dropped a plan to buy control of farmer-owned plants,
another sign of trouble for the industry.
By DAVID ELBERT
REGISTER BUSINESS EDITOR
Des Moines venture capitalist John Pappajohn pulled the plug Tuesday on an
ethanol venture designed to pump money into rural areas by shifting control of
farmer-owned ethanol plants to a publicly owned company.
Pappajohn's plan was to raise at least $800 million from investors to buy control
of six to 10 farmer-owned ethanol plants and place them under unified
management and marketing.
The move by Iowa's best-known investor is another sign of troubling news for the
ethanol industry, which is suffering from low prices and profits and a potential glut
of the biofuel.
"There is consolidation coming in the ethanol industry," said Iowa State
University economics professor John Miranowski. "When an industry grows
very rapidly and you have a large number of small independent producers, this
kind of shakeout is not uncommon."
Pappajohn's plan ended up being too far out in front of the shakeout, Miranowski
said.
For outside investors, it may be years before the industry settles down to the
point where people feel comfortable putting money into ethanol, said Chad Hart,
an economist at the Center for Agricultural and Rural Development at ISU.
"Pappajohn was an outsider, and the consolidation we are seeing now is coming
from insiders," he said.
Pappajohn said he met Tuesday morning with consultants and employees who
helped guide him in his bid to get into the ethanol industry. The group decided
that the sharp drop in the spot-market and futures-market prices for ethanol in
recent months makes their plan unfeasible, Pappajohn said after the meeting.
"At some point you need to acknowledge the market isn't there," he said in an
interview.
"It's time for me to concentrate on other investments," which include new
methods for detecting and curing cancer, Pappajohn said.
Medical and health care investments is how the 79-year-old venture capitalist
made most of his money.
Pappajohn had strayed from that area last year when the ethanol industry was
beginning to heat up, telling friends that he hoped to use his Wall Street skills to
the advantage of farmers and other Midwesterners who had already invested in
ethanol plants.
One of Pappajohn's ethanol advisers was David Kolsrud, a Minnesota farmer and
rural advocate, who suggested that the venture capitalist raise money on Wall
Street for a company that would purchase controlling interest in a group of
farmer-owned ethanol plants around the Midwest.
Pappajohn put together a plan to raise $300 million from an initial stock offering
and $500 million in debt financing. He created a company called Countryside
Renewable Energy and hired a handful of people, including Des Moines
investment banker David Miles, to put the plan into action.
Countryside had signed letters of intent from six farmer-owned cooperatives,
Miles said. But this year's volatile ethanol market made it difficult to move forward
with the plan. The letters of intent expired Oct. 1, and rather than seek new
letters, the company decided to end the venture, Miles said Tuesday.
The ethanol market has been a roller coaster much of the past year, Miles said.
"We've gone from a situation where profits were unsustainably high, to a virtual
absence of profits and the potential for a period that could last several quarters"
of losses.
That makes for a difficult situation for anyone trying to raise money to fund
ethanol ventures, Miles said.
ISU's Hart said some projects are being set aside, "but we still have a bunch
going forward."
Plans for at least a couple of facilities have been announced in Florida and Texas
in recent weeks. The new plants could blend ethanol with gasoline close to
where the fuel will be consumed, Hart said.
"The ethanol industry is experiencing growing pains," he said. "The last time I
looked, the ethanol industry still has 6 billion gallons of capacity under
construction. That would basically double the size of the industry."
The rapid growth has caused a bottleneck: There are not enough tank cars to
carry all the ethanol in the Midwest to large cities on the coast.
"For those who put money into ethanol a couple years ago, it paid off," Hart said.
Ultimately, though, investors will probably be able to buy ethanol plants at much
lower costs than has been the case in the past couple of years, Miranowski said.
Business Editor David Elbert can be reached at (515) 284-8533 or
delbert@dmreg.com