America’s renewed love affair with driving could reshape the U.S. ethanol industry.
Green Plains Inc. said Monday it agreed to buy two plants from Spain’s Abengoa SA, and the European company separately said it would sell two other mills -- with the four sales totaling $350 million. Also at play is The Andersons Inc.’s biofuel arm, which HC2 Holdings Inc. has been jockeying to acquire while working with strategic partners. Further consolidation is probably on the way, Jefferies LLC analysts including Laurence Alexander said in a report Tuesday.
Ethanol makers are on the hunt for deals amid record demand for the biofuel, which has been spurred by rising gasoline consumption. Companies are acting on the lessons learned earlier this year when cheap crude oil, a supply glut and stable corn costs shrunk production margins. Now that ethanol prices have rebounded and revenues are on the rise, the producers are using the extra cash to add scale and improve efficiency.
“Large companies want to get larger,” Heather Jones, an analyst at BB&T Capital Markets in Richmond, Virginia, said by phone. “Just like any other market, the larger you are, the more you can control production and influence prices.”
The U.S. ethanol industry is still fragmented compared to oil, its biggest customer. The five-biggest companies account for about 46 percent of capacity. Most of the other plants are privately owned by local farmers and cooperatives, said Tom Houser, vice president of CoBank, a Greenwood Village, Colorado-based agricultural lender that’s financed about 50 plants.
If the Green Plains deal goes through, the company would supplant Valero Energy Corp. as the third-biggest U.S. ethanol producer by capacity. Archer-Daniels-Midland Co., based in Chicago, is the top producer, followed by Sioux Falls, South Dakota-based Poet LLC.
HC2 Holdings, the holding company run by former hedge fund manager Philip Falcone, came back with an additional strategic partner this month in its latest bid to buy U.S. grain trader The Andersons. HC2 altered its $950 million offer for the rail business and parts of the grains unit, saying it and the new strategic partner would pay $1.15 billion for those businesses plus the ethanol arm. The holding company also said it may consider boosting its rejected $1.04 billion offer for The Andersons.
Jones said in a note this month that Green Plains could be the new unnamed strategic partner working with HC2. Green Plains didn’t immediately return several e-mails and telephone messages seeking comment on the speculation.
In April, Pacific Ethanol Inc.’s largest shareholder Michael Lau’s Candlewood Investment Group hedge fund, wrote a letter, urging the company to look for ways to boost shareholder value, including a possible sale. The Sacramento, California-based company, with 515 million gallons of annual production capacity, has surged 40 percent since the Candlewood filing. Chief Executive Officer Neil Koehler agrees with the fund’s assertion that the shares are undervalued, he said in an interview.
Excluding ethanol byproducts like corn oil and dried distillers grain, the crush margin, a measure of the profit that can be had from turning a bushel of corn into fuel, increased to 17.61 cents on Tuesday, from as low as 2.94 cents in January, data compiled by Bloomberg show.
If it’s successful, the Abengoa plant sale will be the biggest swath of ethanol mills changing hands since the the implosion of VeraSun Energy Corp., once the largest American distiller, in October 2008, Houser of CoBank said.
Green Plains paid about $1.11 a gallon for the two ethanol plants it agreed to buy from Abengoa. That’s lower than the roughly $2 per gallon it cost to build a plant during the industry’s three-year construction boom that ended in 2008, according to Houser.
“If you’re in decent financial shape you could make the argument that you’re buying low right now,” said Paul Resnik, an industry analyst at Uncommon Equities in New York. “If you can buy an ethanol plant for a little over a buck a gallon, that was unheard of years ago.”