Corn-based ethanol fuels arguments as well as cars. As Congress considers legislation to extend subsidies, opponents are mobilizing. Oil companies say market demand should drive growth, the livestock and poultry lobby complains about soaring feed prices, and environmental groups fear possible soil and water degradation. Wall Street has turned negative as well.
Gordon Ommen, CEO of ethanol producer US BioEnergy, thinks the long-term industry prognosis is strong, however, and he doesn't foresee any major changes to his company's aggressive growth strategy. Ommen founded US BioEnergy, which operates eight plants in six Midwestern states, in 2004 and has guided it through six acquisitions, the latest being the company's August purchase of Millennium Ethanol LLC for an undisclosed amount. The company posted 2Q07 revenue of $154.4 million and is one of a handful of small to mid-sized ethanol producers jockeying for position in an industry dominated by global giant Archer Daniels Midland Co. Ommen spoke recently with Corporate Dealmaker's Suzanne Stevens.
Corporate Dealmaker: US BioEnergy was built on a three-way partnership. Can you explain why?
Ommen: The company was started by Ron Fagan and I as a 50/50 company. We put my [PE firm Capitaline Advisors] behind it and his [construction company Fagan Inc.] behind it. We each dug in our pocket and personally funded it. We brought in CHS Inc. in 2005. They are a Fortune 500 company and the largest grain and energy co-op in the US., owned by 325,000 farmers.
How has the ethanol market changed since 2004?
When we founded the company we had $28 a barrel for oil [it was $93 in late October]. We thought it would go to $40 and stay. We had $2.20 a bushel corn [vs. $3.77 in late October]. We liked the business model a lot. I think the tide is going to continue to come in as a function of continued pressure on the supply-demand equation of liquid transportation fuels and the environment equation, both pointing toward green renewables. That creates a very large macro trend.
Ethanol has some pretty harsh critics out there, with opponents charging that ethanol takes more energy to produce than it saves and that it drives up the price of corn, for instance. What's your response?
There are all kinds of people that have an opinion about biofuels and ethanol. The opinions are often based on old data or information. There's a net energy gain today, of about 30%, not a net energy loss. People say, "It's not enough of an energy gain." I say, "Compared to what?" Oil is a net energy loss. Some people will say wind power is the answer. Well, is wind power going to run your car?
Wall Street has also at times been a harsh judge of the industry, noting the high price of corn, an oversupply of ethanol and a lack of infrastructure to transport it. That's certainly had an affect on the stock prices of you and your competitors. (US BioEnergy's stock has dropped from $15.10 upon going public in December 2006 to a recent $7.31).
It's amazing the amount of stir around the industry. People get so caught up in it that they lose sight of the business model. They lose site of increasing demand for energy, a world with tight supplies and high prices for energy, and climate change problems.
It's a juvenile industry with juvenile companies. You shoot the gun over there, the sheep run in this direction. You shoot it over there, they run in this direction. That doesn't change the fundamentals of the business. It's just people reacting over moment-to-moment changes in data.
How does that affect your strategy?
We believe the current industry conditions are not only temporary, but in ways a very predictable and natural part of the process for an industry that is just emerging and has experienced meteoric growth. We did anticipate this type of cycle and from the beginning made decisions and plans to position US Bio for the long term. Specifically, we achieved scale, both through acquisitions and new construction. We established industry-leading expertise in logistics, primarily through our relationship with CHS, plus robust marketing channels and relationships, and an approach to operating our plants in a highly efficient manner.
We want to continue to grow our presence in the biofuel marketplace because we think the tide is roaring in. We look at greenfield projects, we look at acquisitions, we run the numbers. We've got a deal team that's a spinoff of the PE team and that's all they do. They run models for everything. We don't get our teeth set on something and fall in love with it and keep running. We look for what the next best step is.
Tell me a little more about how your deal team is structured.
I told the deal team from early on -- and some of them have been with me a long time in various businesses -- that it's kind of like the guys in the cabin in the woods where one guy goes out and says, "I'm going to find a bear." Pretty soon he sees one and comes running back to the cabin with the bear chasing him. He runs in the front door and says "Skin this one up, boys, I'll go get you another one," as he runs out the back door. We have a deal team that's analyzing and scanning all the time. When we end up working on an opportunity, I'll come in myself and work on the negotiations. Chad Hatch, who heads our deal team, he's a PE guy, is a field general. He's an experienced deal guy and is very accomplished at getting things done and driving a deal through closure.
Is integration a big issue with the plants you buy?
Yes, the hard part is integration. What happens sometimes is people negotiate a deal through concept, through term sheets, through definitive agreement and think they're done. Well, the real test of companies on deals is on the back end. It's integration. One of the people on our deal team is Christie Lee. She's been with me for a decade or so and is very skilled at managing the human side of the transaction and the integration side. Then we have the financial and analytical people.
So we have the field general, the integration person, and the financial, analy+tical piece. Those are the three pillars of the deal team.
What's your forecast for the next year?
We're going from 300 million gallons of flowing production to 780 by the end of next year. That's pretty good growth. The growth track that we're on is very aggressive and we have greenfield sites we could pull the trigger on today and push that up to a billion gallons. We're careful, though. Maybe we could buy them cheaper. I think there needs to be prudence around the paths to growth. We look at 2008 as an environment where margins might be tight. But this is a commodities business. You're going to have years of tight margins. I hope that doesn't surprise anyone.
You've been fairly acquisitive in your three-year history. Do you foresee consolidation of some of the mid-sized ethanol producers like yourself?
I don't know. We've closed six transactions. Our friends at VeraSun have closed a transaction. Those have been companies like ours buying other properties. We expect there may be more of that. Is there value in putting some of those players together? I don't know.
Could the short-term challenges facing the industry force consolidation, particularly among companies that are less financially stable?
Certainly any time a company or industry -- and its investors -- experience financial pressures, such as the pressure on margins and earnings in the ethanol industry, there are a variety of scenarios that could play out, including consolidation. Having already completed six acquisitions over the past three years though, we feel that good opportunities exist at all times, and we will continue to apply our disciplined approach to evaluating those opportunities.
Do you compete at all with PE firms looking to buy in your sector?
Not really. There seem to be some that said, "We can come in and remotely lob some capital to plants that farmers own in the Midwest and somehow that will be a good deal." It might be a good deal, but I'm not sure that's a platform. Last summer we saw people with really ambitious ideas of what they were going to do. They'd fly in from the West Coast and talk to farmers about buying their plants and doing these really ambitious things. The farmers, said, "Really? Who are you?" Well, those people are all gone.
Was going public always part of your growth strategy, and if so, why?
Yes, it was. We felt it was important to provide some of our business partners on a small scale with liquidity and in addition to three big partners we have lots of owners in rural America. Those owners like the ability to get in and out if they want to. If you do a private transaction you end up with registered documents and accredited investors only, typically. We wanted the farmer producer that farms 400 acres of land around the ethanol plant, who may not be an accredited investor, to be able to own some of the company.
Was that a gesture of goodwill or is it good business sense or both?
Both. One of the things that's unique about our company is the interconnection with the fabric of rural America. If you were to go to Main Street of a small town in Nebraska, people know who we are. But come to Wall Street, and it's the other way around. The Millenium transaction was owned by 900 South Dakotans. They're all shareholders of ours. We have very deep penetration of small investors in rural America and many of them grow corn. Around each of our plants we have a local board that integrates us into the community. So we're very connected. CD
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