Des Moines Register
11-30-07
Merger to create ethanol behemoth
By JERRY PERKINS • REGISTER FARM EDITOR • November 30, 2007
Ethanol producers VeraSun Energy Corp. and US BioEnergy Corp. announced
Thursday the largest marriage to be consummated as the industry consolidates.
High corn costs and low ethanol prices have squeezed ethanol producers, from
farmer-owned plants to major agribusinesses. Adding to the uncertainty: the fate
of an energy bill in Congress that would ensure continued demand for biofuels.
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Chad Hart, a biorenewable fuels policy analyst at Iowa State University, said
more ethanol producers will join forces, as long as profit margins remain slim.
Hart said the industry has been through some lean economic times in the past 18
months, but returns have shown a slight improvement in the past month.
"The ethanol industry's profit margins are still tight," he said, "and they should
remain tight for the next six months or so."
VeraSun has headquarters in Brookings, S.D., and operates ethanol plants with
a total annual production of 560 million gallons. It has plants in Fort Dodge and
Charles City and a plant under development in Hartley.
US BioEnergy is based in St. Paul, Minn., and operates four ethanol plants,
including one in Albert City. It also has a plant under construction in Dyersville.
If the merger is completed, the combined company will have nine ethanol plants
in operation and seven more under construction. By the end of 2008, the
combined company will have an annual production capacity of more than 1.6
billion gallons.
Archer Daniels Midland has an annual production capacity of 1.07 billion gallons
and 550 million gallons under construction.
The deal, which has been approved by both companies' boards of directors, was
valued at about $707 million, based on Thursday's closing stock price. VeraSun
will issue 0.81 share of its stock for each outstanding share of US BioEnergy as
of Oct. 31, the companies said.
VeraSun stock closed Thursday at $10.97, up 33 cents. US BioEnergy closed at
$8.42, up 39 cents.
The merger is subject to regulatory approval and a vote of shareholders of both
companies, which will occur some time in the first three months of 2008.
Although the companies announced the deal as a merger, VeraSun stock will
represent about 60 percent of the shares outstanding after the merger, and the
combined company will keep the VeraSun name and trade under VeraSun's
existing New York Stock Exchange ticker symbol, VSE.
Don Endres, VeraSun's chairman, chief executive officer and president, will be
CEO of the combined company. US BioEnergy president and chief executive
officer Gordon Ommen will be chairman.
Endres and Ommen grew up on farms in eastern South Dakota and live next
door to each other in Brookings.
They attend the same church, St. Thomas More Catholic Church, and have
known each other for years, Ommen said in an interview.
Ommen said the companies' ethanol plants stretch from Nebraska to Ohio.
"A map of our assets is pretty impressive," Ommen said. "Our footprint of plants
is complementary."
Endres said in the interview that the merger will allow the combined company to
be a large-scale, low-cost ethanol producer with considerable marketing clout.
"We'll be more relevant to our customers, who are very large (oil companies),
and we will be a more reliable supplier," Endres said.
Both companies have developed technologies that improve the quality of
distillers dried grain, a high-protein livestock feed that is a byproduct of the
ethanol production process, he said.
The combined company's plants will need to buy 600 million bushels of corn to
produce ethanol, Endres said.
"We believe this merger will be good for Iowa," he said.
Ethanol production is growing so fast that it will soon outstrip the mandate set in
2005 requiring 7.5 billion gallons of annual biofuel production by 2012.
Congressional Democrats are currently negotiating a new energy bill that would
require more use of ethanol and biodiesel.
Sano Shimoda, a leading biofuels venture capitalist at BioScience Securities Inc.
in Venice, Calif., said the merger trend will continue as ethanol companies look
for ways to cut costs and improve efficiencies.
"The ethanol industry is getting real," Shimoda said. "It's a question of getting
costs down and improving their economies of scale."
Shimoda compared what is going in ethanol now with the situation in the dot-com
industry several years ago, when billions of dollars in investment money poured
in to finance incredibly fast growth.
After the dot-com bubble burst, a few strong companies such as Yahoo, Google
and eBay emerged after many smaller ventures failed.
"We're going to see real creativity and innovation in creating a sustainable
ethanol industry," he said.
Farm Editor Jerry Perkins can be reached at (515) 284-8456 or
jperkins@dmreg.com