BioFuel Energy Corp.: More Dilution And Shareholder Loss On The Horizon

Apr.29.14 | About: BioFuel Energy (BIOF)

Summary

At a price of $8.66 as of the close on April 25, 2014, shares of BioFuel Energy Corp. are highly overvalued.

The implication of the JBGL reverse takeover: $150M debt financing, dilution from $70M rights offering and equity issuance totaling 10M to 28.7M shares.

This speculative biofuel stock is now a shell; there's the Nasdaq Rule 5101 risk of delisting.

I'll offer an analysis of the financial statement and EV/sales compared to industry.

I'll also look at what the future holds for BioFuel Energy and shareholders; there are reasons for JBGL parties of interest wanting to be acquired by BioFuel.

In recent weeks, BioFuel Energy Corp. (NASDAQ:BIOF) has yielded a return of 458 percent. On Feb. 27, 2014, shares of BioFuel Energy Corporation soared to a high of $4.10 with no apparent news before falling to $3.46 at the close. In subsequent weeks shares of BioFuel Energy fell as low as $2.93 and maintained a high short percentage float. On Friday, March 28, 2014, during after-market hours BioFuel Energy announced a preliminary non-binding proposal from Greenlight Capital and James R. Brickman for a transaction to acquire equity interests of JBGL. Shares squeezed higher in the aftermarket and reached a new 52-week high of $7.80 before falling to $7.30 at the close.

In subsequent weeks, the price per share fell reaching a low of $5.08 while once again maintaining a high short percentage float. During the past eight trading sessions, shares of BioFuel have climbed as high as $9.44 before falling to $8.66 at Friday's market close. The recent increase in share price appears to be due to speculation of the non-binding proposal for the acquisition of JBGL.

Implications of the Non-Binding Proposal With Greenlight Capital and JBGL

Under the terms of the proposal, BioFuel Energy would acquire all equity interests of JBGL. JBGL is a limited partnership owning a large range of real estate investment based out of Delaware and owned by Greenlight Capital and Brickman Parties. The proposed purchase price for JBGL is $275M, payable in cash and shares of common stock. The purchase price and working capital would be funded through new debt financing in the form of long-term debt, rights offering of common stock, the issuance of common stock, and BioFuel Energy's cash on hand.

Under the contract terms, immediately prior to the acquisition, BioFuel Energy will borrow approximately $150M from Greenlight Capital and Brickman Parties. The effective fixed interest rate of 10 percent per annum will be applied to the $150M long-term debt with a five-year maturity date from closing. This will add $150M in long-term debt to a company with total assets of roughly $15.6M. The total cost of the $150M long-term debt can be found using the formula 150M* (1.1)5 to find a total balance $241,576,500. By subtracting $150M from the total balance a total amount in interest paid of $91.6M is found.

The next clause states BioFuel Energy must conduct a rights offering to raise at least $70M, in which the offering price will be no greater than $5.00 per share and no less than $1.50 per share of common stock. The table below shows the minimum number of shares BioFuel Energy would need to offer in order to raise $70M at the low, mid-, and high end of the allowable price per share as specified in the contract.

Price Per Share

Number of Shares

$1.50

46M

$3.25

21.5M

$5.00

14M

Click to enlarge

As can be seen the table I created above, in the price range of $1.50 to $5.00 per share BioFuel Energy will need to offer between 14M and 46M shares of common stock. This means shares will be diluted 2.5 to 8x to that of the current 5.44M outstanding shares.

The last significant term disclosed in the contract is an Equity Issuance. Under the current clause, BioFuel Energy would be required to issue shares of common stock to Greenlight Capital and Brickman Parties as a partial consideration for their interest in JBGL. The proposal states:

Pursuant to the Equity Issuance, the Company will issue a number of shares of Common Stock such that immediately after the Rights Offering and the Equity Issuance (A) Greenlight Capital will own 49.9% of the outstanding Common Stock, and (B) the Brickman Parties will own 8.4% of the outstanding Common Stock. The shares of Common Stock issued in the Equity Issuance will be valued at a price per share equal to the weighted average price per share of the Common Stock immediately following the Rights Offering and the balance of the Purchase Price shall be paid in cash.

This portion of the contract quoted above will do a couple of things. First, it will put Greenlight Capital in a very close position to being a majority share holder. Second, this will cause for greater dilution. Greenlight Capital will receive shares at the average equal weight of price immediately following the rights offering for nothing. In total, the clause requires a 58.3 percent holding of common stock by Greenlight Capital (49.9 percent) and Brickman Parties (8.4 percent). This is required to be conducted following the rights offering of $70M worth of common stock as mentioned above. The table below displays the additional number of shares needed to be issued in order to meet the 58.3% holding following the $70M rights offering at the low, mid-, and high price per share.

(The current number of outstanding shares is 5.44M. Greenlight Capital currently holds 2.2M shares of BioFuel Energy.)

Total Outstanding Shares after $70M R.O.

Total Additional Shares to Meet 58.3% required holding

R.O. @ $1.50 PPS= 51.44 M Shares

28.7 M

R.O. @ $3.25 PPS= 26.94 M Shares

14.4 M

R.O. @ $5.00 PPS= 19.44 M Shares

10.1 M

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In the next table I created, I will show the overall dilution implied by the proposal terms once again at the low, mid- and high price per share.

Price Per Share of 70M R.O.

Total Outstanding Shares Following R.O. and Equity Issuance

R.O. @ $1.50 PPS

80.14 M shares

R.O. @ $3.25 PPS

41.34 M shares

R.O. @ 5.00 PPS

29.54 M shares

Click to enlarge

Evidence of the data in the table I created above, BioFuel Energy will be diluted 5.4 to 14.7x the amount of current outstanding shares of 5.44M. Using the mid-range amount an increase in dilution of 7.59x can be found.

In summary, the transaction described in the non binding proposal will have the following effects. BioFuel Energy will incur long-term debt of $150M totaling $241M with interest included. BioFuel Energy will also be required to raise $70M adding between 14M and 46M outstanding shares to the current float of 5.44M shares. Following the acquisition, BioFuel Energy's board of directors would consist of David Einhorn, Brickman, and other members to be agreed. David Einhorn and James Brickman would then become combined shareholders of 58.3 percent of BioFuel Energy. This will require "Equity Issuance" that will add an additional 10M to 28.7M outstanding shares to the float. This will cause a dilution to share value of 5.4 to 14.7x their current value at the time of closing. The $150 in long-term debt will have a negative impact on company equity and the bottom line. The rights offering and equity issuance will greatly dilute the current number of shares and decrease value.

Why would BioFuel Energy go through with this deal? At one time, BioFuel Energy appeared to be a speculative, but promising investment. In 2007, at the height of the bio fuel craze, BioFuel Energy market reached a $1 billion market capitalization. Over the coming months and years bio fuels did not develop or gain market share as speculated. During the ensuing months the hype died and shares crashed falling from a peak of $239.40 in July 2007 to $5.00 in March 2009. In November 2013, BioFuel Energy completed a deal with lenders to avoid foreclosure.

Lenders exercised a right under a "Deed in Lieu" to acquire the company's ethanol plants. Under the terms of the Deed in Lieu, lenders extinguished all of the amounts due under the credit facility, which totaled $177M on Sept. 30, 2013. This also allowed the company to carry forward tax losses of $250M to help defray future expenses. The tax losses still are the company's only significant remaining asset along with another $12.6M in cash. In summary this means BioFuel Energy is a "shell company," meaning the company does not have any significant operations. Pursuant to the 10-K issued March 24, 2014, BioFuel Energy is at risk of delisting under Rule 5101 and forced to list on the over-the-counter exchange. Biofuel Energy has few other options if the company wishes to stay on a major exchange other than to accept the proposed deal from Greenlight Capital and Brickman Parties.

The Financial Statements and Ratios of Bio Fuel Energy

A quick and dirty analysis of Biofuel Energy stock shows an annual net loss for 2013 of ($39m) and loss in the most recent quarter of ($26M). The most recent balance sheet displays $15M in current assets with positive equity of $18M. Net cash in the past four quarters has been positive, which can be primarily attributed to the selling of the company's ethanol plants. To compute a fair value of BioFuel Energy shares EV/EBITDA could not be used as the company's EBITDA is negative. Instead, EV/sale was used to determine a fair value. Enterprise value is computed as follows:

Enterprise Value = Market Value of Equity + Market value of Debt - Cash Holdings

$47.13M (Market Cap BIOF) + $4.3M (Current Liabilities) - $15.13M (Liquid Assets) = $36.3M (NYSE:EV)

EV/Sale

$36.3M / $298K (Net Sales 2013) = 121.8

The above calculation means for every $121.80 of market current market capitalization, BioFuel Energy is expected to produce $1 of sales. The table below displays the industry average for similar companies to that of BioFuel Energy.

Industry Name

Number of firms

EV/Sales

Oil/Gas (Integrated)

8

1.22

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The table shows on average EV/sale is 1.22 for company's in the same industry as BioFuel Energy. Considering the poor fundamentals of BioFuel Energy, the company should not be valued higher than other companies within the sector that overall have substantially better fundamentals. Using this metric to value BioFuel Energy, a price per share valuation of $0.08 is derived. If the acquisition of JBGL does indeed happen and the dilution in the contract takes place, BioFuel Energy will be worth pennies.

The Future of BioFuel Energy, Possible Reasons JBGL Proposed to Be Acquired

The future of BioFuel Energy is uncertain and as poor as the deal to acquire JBGL is on the surface the company really has no other choice. Best-case scenario, the company can avoid delisting and over a number of years pay off long-term debt. Greenlight Capital has likely realized it earlier investments in BioFuel Energy are a loss and are cutting their losses through a reverse takeover. By BioFuel Energy taking over JBGL, JBGL and associates will be able to take advantage of the company's remaining tax losses of $178M. BioFuel Energy will no longer be a shell and likely change names as it will become a real estate company.

All of these things are positive in the long run; however, the current price per share is grossly overvalued and the acquisition of JBGL will make for a large amount of debt and dilution. Greenlight Capital along with Brickman Parties stands to receive millions of shares at a discounted price or for nothing at all while accumulating interest payments greater than $91M. The reason for recent price action can only be attributed to misunderstanding of proposed transaction, along with a high short holding with a series of short squeezes pushing the stock price higher for no fundamental or even logical reason. BioFuel Energy will likely report earnings on or before May 15, 2014, which will likely have a negative impact on share price.

Disclosure: I am short BIOF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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