Valero wins bid to acquire VeraSun plants

By Bryan Sims | March 05, 2009
Web exclusive posted March 20, 2009, at 2:02 p.m. CST

On March 18, a Delaware bankruptcy court approved the auction sale of seven VeraSun Energy Corp. plants to Valero Renewable Fuels, a subsidiary of Valero Energy Corp., for a total of $477 million. The deal is expected to close April 1.

In addition to the five plants and a sixth site under development in Valero's initial bid, the bankruptcy court approved Valero's purchase of two additional ethanol plants. Collectively, Valero acquires an annual production capacity of 780 MMgy from the seven facilities. The aggregate purchase price of $477 million represented approximately 30 percent of the plants' replacement cost. The purchase price excluded approximately $75 million in working capital. Credit Suisse advised Valero on the transaction.

Valero Renewable Fuels successfully submitted a bid at a base price of $350 million for five plants in the "VSE Group" in Aurora, S.D.; Charles City, Iowa; Fort Dodge, Iowa; Hartley, Iowa; Welcome, Minn.; and a development site in Reynolds, Ind. Valero also successfully bid on an ethanol plant in Albert City, Iowa for $72 million, formerly a U.S. BioEnergy Corp. facility acquired by VeraSun in March 2008, and a plant in Albion, Neb. for $55 million, acquired from ASAlliance Biofuels. As a result of the transaction, Valero plans to operate all of the plants through its subsidiaries and will acquire VeraSun's management staff at each plant location.

Four of VeraSun's 16 total ethanol plants—VeraSun Aurora LLC, VeraSun Charles City LLC, VeraSun Fort Dodge LLC and VeraSun Hartley LLC—currently remain in operation.

"These are high-quality, relatively new assets in good locations for buying feedstocks," said Valero Chairman and Chief Executive Officer Bill Klesse. "We expect increases in the renewable fuels standard to continue. We are also pleased to have such quality people join Valero."

The secured lenders for the remaining facilities submitted successful credit bids to acquire the remaining nine VeraSun plants.

Dougherty Funding LLC submitted a credit bid of $93 million for VeraSun's 110 MMgy plant in Marion, S.D. A group of lenders led by AgStar Financial Services submitted a credit bid of $324 million for the remaining "US BioEnergy Group," which includes ethanol facilities in Central City and Ord, Neb.; Dyersville, Iowa; Hankinson, N.D.; Janesville, Minn.; and Woodbury, Mich. A group of lenders led by West LB AG submitted a credit bid of $99 million for the remaining "ASA Group" facilities, which consist of ethanol plants in Bloomingburg, Ohio, and Linden, Ind.

"This purchase will protect the interests of AgStar stockholders and our fellow creditors in the lending group," said Paul DeBriyn, president and chief executive officer of AgStar Financial Services in a company statement. "That's what this credit bid accomplishes. Basically, we've taken the necessary steps to ensure these plants will be sold for fair market value. These facilities, and the people working in them, are highly valued assets."

According to AgStar Financial Services, the lender said the six purchased facilities "will remain in idle mode for an estimated 60 days while buyers are secured for these assets." However, AgStar said it has already received ample interest in the plants from potential buyers, but didn't disclose specific parties.

Agri-business giant Archer Daniels Midland Co. and Cargill Inc. also participated in the bidding process for the plants. Valero raised its bid from an initial bid of $.50 per gallon to $.61 per gallon of production capacity, according to bankruptcy court documents.

The transaction solidifies Valero's initial entry into the ethanol marketplace as a leading buyer of ethanol for blending into its gasoline; purchasing the facilities will give Valero a dedicated supply of ethanol. Based in San Antonio, Valero is one of the nation's largest oil refiners with operations in Texas, Oklahoma, Louisiana, Tennessee, New Jersey and California.

Though Valero's entry into ethanol isn't the first by a major oil company, the transaction is a clear sign that the petroleum industry is more than willing and able to capture a significant stake in a commodity that has strong agricultural roots entrenched in its base.

"[This transaction] introduces a new player into the [ethanol] market dynamics of ethanol," said Rob Carringer, managing partner for CRG Partners LLC, a New York-based firm that offers turnaround management, crisis management, performance improvement and financial restructuring services for a variety of industries, including the ethanol industry.

"That new player is an integrated oil company with $120 billion in revenue," he added. "When you compare that to the other ethanol producers, many of them which are [farmer] co-ops, it just dwarfs them. And, they've got a strong balance sheet."

According to Todd Alexander, a partner with law firm Chadbourne & Parke LLP, other pure-play ethanol companies such as Poet LLC and/or ADM and Cargill remain likely candidates to acquire other financially distressed ethanol assets that fit their specific ethanol business models.

"This is really the first time that somebody from the petroleum complex has made a significant investment in the ethanol industry," Alexander said. "There have been other oil majors like Marathon Oil Corp. that have made investments in the industry by way of joint ventures and partnerships, but none of this magnitude.

"It definitely raises very interesting questions as to whether what has been an agriculturally-based industry now will just become one additional segment of the overall petroleum complex," he said. "I think it's too early to say that."