Ethanol Industry to Consolidate?

Facing much slower growth, the ethanol industry is likely to see more mergers and acquisitions in the future, according to a financial expert who spoke Wednesday at a biofuels conference in Bloomington.

Bob Dovenberg, a managing director of Minneapolis-based Greene Holcomb Fisher’s Energy and Infrastructure Group, told more than 90 people that, like other industries, the biofuels’ industry may eventually be reduced to just a few companies.  The conference was sponsored by Willmar-based Christianson & Associates.

Dovenberg pointed to the history of other industries as a harbinger. Detroit and the oil industry once had hundreds of competitors but now have just a handful, he said.  While most investors shy away from ethanol plants because of the industry’s volatility, he said, he believes there will be plenty of sales of both healthy and distressed plants. “There is money going into energy production,” he said.

An example of the type of acquisition in the biofuels industry that could become more common is the one that happened last December when Dovenberg’s company worked on the acquisition by Flint Hills Resources LLC of Wichita, Kan., of a Fairmont, Neb. ethanol plant owned by Bloomington-based Advanced BioEnergy LLC.

The deal made sense because the plant had good access to major transportation routes, he said, and it fit into Flint Hills’ strategy of acquiring ethanol plants. The company now owns five ethanol operations, four of them in Iowa, and it has made investments in three other biofuels companies, according to its website.

Another sign of the potential for mergers and acquisitions is that the ethanol industry has begun to mature. The industry is somewhat “overbuilt,” Dovenberg said, as reflected in the mothballing of 26 ethanol plants, about 10 percent of the industry’s capacity. Those could reopen, he said, but their status indicates that production isn’t increasing.

“There are only four plants under construction now and only one in the Corn Belt,” Dovenberg said. “The economics just don’t justify adding new plants.”

The M&A market will be bifurcated, he predicted, with high prices being fetched by more modern plants with a capacity to produce 100 million gallons or more annually of ethanol. Meanwhile, distressed properties will remain sellable, he said, but at fire sale prices.

Potential buyers of plants are a small club, he said, and many of their members will contact ethanol companies directly to inquire about deals. His firm can put together a “book” for clients to distribute to companies who might consider an acquisition, but that’s usually not necessary in the small ethanol community.

Tom Houser, lead relationship manager of St. Louis Park-based CoBank‘s regional agribusiness group, largely agreed with Dovenberg’s assessment. The industry continues to struggle with too much supply and capacity, leading the lending community to look much more closely at deals than in the past, he said.

“There’s really only a handful of banks willing to do a deal” to acquire or build a plant, said Houser. The industry’s decision to add corn oil production and other value-added products to some plants is a good idea to increase revenue flow, he said, but it can’t offset losses of a weak market.

Houser said the majority of ethanol plants are still independently operated and, unlike Dovenberg, he believes it will remain this way for some time. In addition, he said, he worries that if the corn crop this year falls and food prices increase, Congress will be under great pressure to end or change its ethanol programs.

Addressing those concerns was Brian Jennings, executive vice president of the American Coalition for Ethanol, who complained that the U.S. House of Representatives worked to end the “renewable fuel standard,” or RFS, in the 2013 farm bill, which was defeated in the House on Thursday. The RFS helped to create a market for ethanol as a gasoline additive, though that has long been a controversial program.

Minnesota has been a national leader in ethanol for years. The state ranks fifth in ethanol production, with more than 1.1 billion gallons produced annually by 21 plants, according to the Minnesota Department of Agriculture’s website. The state also has one of the more aggressive mandates for blending of ethanol into gasoline. That’s even though Gov. Mark Dayton signed a bill last year that gives blenders until 2015 — rather than this year, as the original legislation called for — to reach an E-20 blend (80 percent gasoline, 20 percent ethanol).

If the renewable fuel standard disappears, the industry won’t disappear with it, Houser contends.  “Even if they pull the mandate, there will still be an ethanol industry,” he said.

Source: Finance and Commerce