VeraSun, USBioenergy Merger: Important Event in the Ethanol Industry

VeraSun (VSE) is buying U.S. Bioenergy (USBE) in an all stock purchase, paying .81 shares of VSE stock for each share of USBE, a premium of 11%. The value of the deal is about $700 million and will put VeraSun on par with ADM (ADM) as the leaders in ethanol production. Earlier this year VSE bought ASA Alliance Biofuels for $725 million.

VeraSun will have production capacity of 1.6 billion gallons of ethanol by the end of 2008. The combined company will have nine ethanol plants and seven under construction.

This is an important event in the ethanol industry. VeraSun has been committed to it’s goal to become a large scale, low cost ethanol producer. I think this merger will make VSE too big for another company [ADM] to buy and leave them free to work on their growth plans. I see several positives for VeraSun in this move.

• First, economies of scale. The ethanol industry has very tight margins now, and VSE and USBE were the most profitable in this sector. This merger should improve the profitability of the resulting company.
• Second, growth can continue. With seven plants under construction, the new VeraSun will continue to grow revenues and profits.
• Finally, it appears VeraSun is buying up the competition near the bottom of the market. Future profitability will be significantly magnified when commodity prices turn in the favor of ethanol.

In the same news block at MarketWatch is the story about the fire on an oil pipeline from Canada that provides 20% of U.S. oil imports from Canada. This can only be good news for domestic fuel production, such as ethanol.

VeraSun is a component of my hypothetical 20 Stock Portfolio, and I think today’s news is definitely a positive for the company.

Disclosure: I do not own any shares of VSE at this time.