VeraSun to buy US BioEnergy in ethanol combination
Thu Nov 29, 2007 4:28pm EST
NEW YORK, Nov 29 (Reuters) - VeraSun Energy Corp said on Thursday it would acquire US BioEnergy Corp in a bid to expand its ethanol capacity, in an all-stock deal that values US BioEnergy at $686 million.
Ethanol makers have recently seen slimming profit margins due to rising costs, high corn prices and logistics issues that have led industry watchers to expect increased consolidation.
"Ethanol is a commodity business with fairly low barriers to entry and as a result it is only natural that pricing will tend to move toward the long-run marginal cost of production," said Todd Alexander, a partner at Chadbourne & Parke LLP, a law firm that has worked on a number of ethanol industry deals.
It is natural to see mergers in such a market, said Alexander, and he expects the consolidation trend to continue.
VeraSun will issue 0.81 shares of its common stock for every US BioEnergy share, representing a premium of about 7 percent based on both companies' closing prices on Wednesday.
The companies said the deal represents a premium of 11 percent based on Friday's closing price for both shares. On that basis, US BioEnergy would be worth about $658 million.
The deal value calculated is based on shares outstanding as listed in both companies' most recent regulatory filings.
VeraSun shares rose 2.4 percent to $10.89 in Thursday afternoon trading on the New York Stock Exchange, while US BioEnergy rose 4.6 percent to $8.40 on the Nasdaq.
"The valuation of the acquisition appears reasonable based on the current valuations of publicly traded ethanol pure-plays," Banc of America analyst Eric Brown said in a note to clients.
The companies expect the deal to close in the first quarter of 2008. The combined entity will keep VeraSun's name and trade under its existing New York Stock Exchange ticker symbol.
"I think it's a very good transaction, it does change the landscape ... in terms of who's left, who can buy and what the pricing power is going to look like after this deal closes," said Soleil Securities analyst Ian Horowitz.
Horowitz also expects further consolidation in the ethanol arena, but said valuations on future deals may decline given that VeraSun is buying one of the best names in the business for a fairly cheap price.
VeraSun Chairman and Chief Executive Donald Endres will remain CEO after the merger, while US BioEnergy's president and CEO, Gordon Ommen, will succeed Endres as VeraSun chairman.
VeraSun expects the deal to add to earnings in 2008 and expects annual savings of $80 million to $160 million from the deal 18 months following the merger.
"We are very pleased with the combination of these two companies ... and together we will create a very compelling platform long term," Endres said in an interview with Reuters.
With combined ethanol production capacity of 1.6 billion gallons by the end of 2008, the enlarged company will be one of the top industry players both in North America and worldwide.
Upon closing the deal, VeraSun will have nine production facilities operating and seven facilities under construction.
Morgan Stanley acted as financial adviser to VeraSun, while UBS advised US BioEnergy on the deal.
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