VeraSun's all-stock acquisition of its smaller competitor will boost its annual production capacity to 1.6 billion gallons by the end of 2008, potentially making it the largest U.S. ethanol producer. Archer-Daniels-Midland Co., the current top producer, currently has a capacity of 1.07 billion gallons per year and is targeting 1.7 billion gallons per year after completing construction of two corn milling plants.
However, the industry has received harsh criticism for expanding capacity beyond demand, causing ethanol prices to plummet as corn costs rose sharply.
The deal is "emblematic of the huge amount of new capacity that is expected to come online in the next 12 months," Banc of America Securities analyst Eric Brown said in a note Thursday. "We believe that new capacity, combined with higher corn prices, will pressure ethanol production margins." Brown is cautious on renewable-energy stocks and rates VeraSun a "Sell."
Under the agreement, 0.81 shares of VeraSun stock will be issued for each outstanding share of U.S. BioEnergy, valuing the deal at $686.2 million (€465.6 million) based on Wednesday's closing prices and U.S. BioEnergy's 79.6 million shares as of Oct. 31.
Brown called the valuation "reasonable" based on current ethanol stock values.
VeraSun shares will represent 60 percent of the combined company, which is expected to have a market capitalization of about $1.5 billion (€1.02 billion).
VeraSun Chief Executive Don Endres will serve as CEO, with U.S. BioEnergy President and CEO Gorden Ommen to become chairman and VeraSun Chief Financial Officer Danny Herron to become president of the combined company.
After the acquisition is complete, Brookings, South Dakota-based VeraSun will have nine ethanol production facilities in operation and seven additional facilities under construction. VeraSun currently operates five ethanol production facilities that can produce a combined 560 million gallons of ethanol per year and four more plants under construction. Once those facilities are built, the company expects to be able to produce 1 billion gallons per year.
U.S. BioEnergy, based in Inver Grove Heights, Minnesota, operates four ethanol plants and has additional facilities under construction expected to boost the company's total production capacity to 750 million gallons per year.
Last quarter, as most pure-play ethanol makers posted losses, VeraSun and US BioEnergy were both profitable due to their expansion and cost-cutting measures. Yet commodity-price pressures still hurt both companies' third-quarter earnings, and analysts expect both companies to lose money in the fourth quarter.
The deal is expected to close in the first quarter of 2008 pending shareholder approval and regulatory clearances.