Industry growth now coming through mergers, acquisitions

By Holly Jessen | May 03, 2011

First it was the build-out phase, with multiple ethanol plants going up at one time. After that came the distressed plant phase, when shuttered or bankrupt facilities were purchased by other entities. Scott McDermott, a partner with Ascendant Partners Inc., considers this the reorganization phase.

With a more stable market for ethanol, production facilities are working to improve performance, by marginally expanding production and doing everything that can be done to lower the cost curve. Other companies are working on capital restructuring through mergers or acquisitions. It’s all about positioning the business for the future, McDermott tells EPM.

The good news is that lenders are exhibiting more confidence than has been seen recently, added Kirk Martin, a partner with the same firm. There’s a willingness to help fund acquisitions and cooperate with debt restructuring. “There’s some capital available that might not have been available even six months ago,” he told EPM.

McDermott is one of four speakers tackling the topic of mergers and acquisitions at the International Fuel Ethanol Workshop & Expo, set for June 27 to 30 in Indianapolis, Ind. He’ll join Donna Funk, Kennedy and Coe LLC, Dean Edstrom, Lindquist & Vennum PLLP, and Brad Kruse, BrownWinick Law Firm for a panel presentation titled “Come Together: Successfully Navigating Mergers and Acquisitions.”

Kruse said we’re in a time when many are “kicking tires,” showing interest in acquiring assets. Mergers are also big. “At this time there’s a lot of potential for consolidation,” he said, “and I would expect to see more in the future.”

There’s a lot to keep in mind when a company is restructuring, Martin said. In the last six months, Ascendant has assisted in the successful sale of the Tate and Lyle ethanol plant in Fort Dodge, Iowa, and the former Gateway ethanol plant in Pratt, Kan. The company is also actively engaged with several other plants on such activities as strategic planning, enterprise evaluations and assistance with raising and restructuring capital. It’s easy, he said, to think about mergers or acquisitions, but difficult to actually get all the way through the process successfully. The first key is to recognize that difficulty and take a disciplined approach, determining what the company wants out of the deal before the process starts, not as it develops. “You’ve got to Begin with the end in mind,” he said. “What is it you are trying to achieve with this process?”

The next step is making sure the right people are on the team. That means internal employees with experience in these matters and external resources, such as financial and legal counsel. Both are critical to success, Martin said.  

Finally, Martin advises clients to make the commitment to see the process through. Although there’s bound to be challenges both the buyer and the seller need to be committed if a sale or merger is to become a reality. “There’s just so many landmines between the decision to do something like that and the actual executing the documents and closing the sale or merger,” McDermott added. “If you don’t have (commitment to the deal) in the recipe the odds become little and none,”

It’s surprising, but true, that many ethanol plant board members don’t fully understand the financial side of the business. For example, what’s the historical value of the ethanol plant, what’s the stock price, what is the market price for the plant and other comparable sales. Board members often get caught up in the day-to-day details of running the business and are unprepared when faced with an opportunity for a sale, merger or acquisition. “A lot times that drives reactive behavior,” he said.

Ascendant Partners Inc. helps boards quantify the value of the options they face, Martin said. What, for example, would the value of the plant be if it were expanded? Can the company afford to acquire assets? If the company were to go through a merger would it actually buy anything for the current business? Whatever the goals and the objectives are, this kind of information helps boards understand the economic realities of their decisions. “It really grounds the discussion in the business and the economics,” he said.

Kruse, who has worked with clients looking to acquire assets and working through bankruptcy, talked about some of the same questions ethanol plant board members should ask themselves. If the company is thinking about an acquisition does it fit in with the company’s business model, he asked. It’s vital that the company do its due diligence, getting the most and accurate information possible on the company in question. Even due diligence, however, can’t predict every possible difficulty. “Sometimes an asset looks really good on paper but there can be some surprises in terms of implementing or integrating the asset,” he told EPM.