Ethanol producers announce merger plans
By: John Brannon Messenger Staff Reporter
By JOHN BRANNON
Messenger Staff Reporter
In unity there is strength.
That ancient adage explains why the owners of the new ethanol plant now under construction in Obion decided to merge with others of like minds.
“In tough times like these, a single plant could never survive,” said Ethanol Grain Processors chief executive officer Jim Pat-terson.
A press release earlier today from Green Plains Renewable Energy Inc. of Omaha, Neb., announces it and VBV and their subsidiaries “have entered into a definitive merger agreement.”
According to the release, the merger will create a “vertically-integrated” ethanol company with an expected operating capacity of 330 million gallons of ethanol per year. All parties have signed a formal agreement creating the merger, which will require shareholder and equity holder approvals as well as “customary lender and regulatory consents.” The approval process should take about 75 days, Patterson said.
Meanwhile, construction of the $170 million ethanol plant on McDonald Road near Obion continues. A target date of Oct. 9 has been set for the plant to be operational.
Wayne Hoovestol, Green Plains chief executive officer, said the merger will create one of the nation’s largest publicly-traded pure-play ethanol companies, based on projected year-end capacity. “Both companies will benefit from the increased scope, scale and critical mass afforded by this merger, which will substantially increase revenues, add value to existing enterprises and create new opportunities for growth. We are strong and more diverse as a combined company, and we believe this is in the best interest of all stakeholders.”
Green Plains Renewable Ener-gy Inc. is traded on NASDAQ and AMEX stock exchanges.
VBV holds majority interest in the Obion plant and the Indiana Bio-Energy plant under construction at Bluffton, Ind. Both plants are expected to be completed this fall. Once operational, each is expected to produce at least 110 million gallons of ethanol a year.
Upon closing — meaning when the proposed merger gains final approval — VBV, Indiana Bio-Energy and Ethanol Grain Processors will be merged into subsidiaries of Green Plains. Current equity holders of VBV, IBE and EGP will receive Green Plains’ common stock and options totaling 11,139,000 shares.
Also, upon closing, certain of VBV’s equity holders will invest $60 million in Green Plains’ common stock at a price of $10 per share, or an additional 6 million shares. This additional investment is expected to be used for general corporate purposes and to finance future acquisitions. At current market prices, the transaction is valued at $383 million, which includes $212 million of IBE and EGP projected debt upon completion of the ethanol plants, $60 million in equity investment and $111 million in new equity issued.
The combined company will be governed by a nine-member board of directors.
VBV CEO Todd Becker said VBV and Green Plains share a common philosophy and vision. “Both believe that vertical integration — from corn procurement through ethanol production, marketing and distribution — is the best strategy to minimize risk, reduce cost and increase efficiency,” he said. “We also share an aggressive strategy for growth through acquisitions.”
United for protection
Patterson gives an example of why the merger is important. In an ethanol plant that produces 100 million gallons a year, if producers can increase their margin between the cost of corn and thesales price for ethanol just one penny, that’s $1 million on the bottom line.
“So this is a game of pennies,” he said.
And the merger is not intended to create a profit. In fact, it will create a tax loss to shareholders. “But it’s just a paper loss,” he said. “What it does, it lifts the shareholder out of a single plant at Obion, Tenn., that’s subject to all the vagaries of the market, and puts it into a combination of companies with geographic diversity and business line diversity. We’re going to get into marketing and into distribution and a lot of other things. So we will have other lines of income. We’re not depending on just ethanol.”
Simply stated, it a matter of diversifying risks by getting other business lines in place. “It will have superior management, top national and international minds. And capital. This new company will have something in the neighborhood of $80 million to $100 million cash on its balance sheet.”
“Think of it this way,” he continued. “When we started building this (Obion) plant, our working capital budget was $14 million. Working capital is what you use to buy your corn and stuff with.”
Consider this, too. The Obion plant has four corn silos, each with a capacity of 500,000 bushels, or 2 million bushels total. “For us, that’s a 21-day supply of corn. We go through 100,000 bushels a day,” Patterson said. “At $2 a bushel, those 2 million bushels would have cost us $4 million. And that was to fill up our silos for 21 days.
“What does corn cost now? At (market price) $6.25 a bushel — $12,500,000. That takes up every bit of our working capital. That’s why this merger is important. By going into the merger, we’ve got $80 million to $100 million cash on the balance sheet to enable us to get through tough times like these.”
Patterson said the Obion County Commission, which has been reluctant to grant a tax abatement to the EGP plant, needs to understand something. “A lot of people have the misguided notion that this EGP plant is a cash cow sitting out there that can pay for the losses of the Plastech plant in Kenton and elsewhere. We can’t,” he said. “We paid our way through everything we’ve built so far. All we wanted is a break. Your commissioners can make a choice to try to help this plant, try to keep it in this community long-term and add economic benefits or they can just pile more bricks on our wagon.”
Published in The Messenger 5.08.08