Ethanol M&A: VeraSun & US BioEnergy

VeraSun logoThe inevitable shakeout of the profit-squeezed ethanol industry is coming to pass. VeraSun has agreed to buy US BioEnergy, bringing together two of the nation’s largest ethanol producers to form a company with a projected market capitalization of $1.5 billion and production capacity of more than 1.6 billion gallons a year.
Even as ethanol prices remain low and corn prices remain high, ethanol production continues to expand. Added capacity has already pushed ethanol’s profit margins to less than 25 cents a gallon from over $2 last year, so further industry consolidation is likely. Cost-cutting and expansion kept VeraSun (VSE) and US BioEnergy (USBE) profitable in the third quarter, but analysts expect both companies to post losses for the current three-month period.

VeraSun’s outstanding stock will represent 60 percent of the shares of the new company (still named VeraSun); 0.81 shares of VeraSun common stock will be issued for each share of U.S. BioEnergy common stock — a roughly 11 percent premium over Nov. 23’s closing prices. VeraSun CEO and president Donald Endres will serve as CEO of the new company, while US BioEnergy CEO Gordon Ommen will serve as chairman.
The new VeraSun will have 870 million gallons of production capacity, with another 880 million gallons of production capacity currently under construction due to come online in 2008. Archer Daniels Midland (ADM), meanwhile, currently the largest domestic producer of ethanol, has a production capacity of over a billion gallons and plans to expand that to more than 1.7 billion gallons in 2008. Current U.S. production stands at about 7 billion gallons, less than 4 percent of U.S. gasoline consumption.
As the wrangling over increased renewable fuel mandates in the Energy Bill continues and oil prices remain high, the tumult in the ethanol industry shows no signs of abating. Today’s VeraSun-US BioEnergy tie-up is likely just the beginning of further consolidation.
VeraSun Capacity
Graph from Green Car Congress.