When VeraSun Energy (VSE) revealed last week it had somehow managed to lock in corn supply prices for the 3rd quarter at near record prices and would incur a $100 million loss for the quarter, the stock dropped over 70% in a single day. Until that point I had believed the company management was doing a pretty good job of growing the business and squeezing out profits during a difficult period. With one bad decision they put the company at a risk of bankruptcy.
An attempt to raise cash by selling stock failed when the news of the pending losses hammered the stock. The stock offering was withdrawn and the most recent press release started out with this nugget:
In light of strategic interest expressed by multiple parties during its current equity offering, VeraSun Energy Corporation (”VeraSun”) (NYSE: VSE) has retained Morgan Stanley (NYSE:MS) to act in an advisory capacity to evaluate strategic alternatives.
This has been interpreted as a desire to have the company bought out by a deeper pocketed party. My ramblings on Sunday attempted a guess at a buyout value and I want to take another look at that possibility. First, a listing of what VSE has going for it:
- VeraSun owns 14 ethanol plants with a total annual capacity of 1.6 billion gallons. The current cost to construct a 100 million gallon capacity ethanol plant is at least $200 million. 14 times $200 million is a $2.8 billion value on the plants.
- VeraSun generated over $1 billion in revenue in the last quarter with 3 plants yet to come on line. The company is able to sell every gallon it can produce and has had to buy 3rd party product to meet customer demand. A guess is that with all plants running the company can generate $6 billion in annual revenue.
- Corn and ethanol commodity prices seem to be locked into a tango where they rise and fall in tandem. This price dance allows ethanol producers a small net profit per gallon. Increasing efficiency and co-product sales offer potential for expanding profits.
I see the negatives for VSE as two-fold: First, the current slim profit margins leave no room for errors such as the company made for the current quarter. Second, public opinion concerning ethanol as a fuel source is ambivalent at best. Government policies drive a certain level of use of ethanol but the product is not really seen as a viable alternative to gasoline.
I do believe that VeraSun could be attractive to the right buyer. VSE has $1.6 billion in long term liabilities and a current market cap of less than $300 million. Paying $2 to $2.5 billion for VSE would be a drop in the bucket for one of the major oil companies attempting to green up its image, or maybe a private buyer like $120 billion revenue ag giant Cargill.
At this point I do not believe that VSE has enough cash to cover its losses for the quarter and continue operations. Its options are to either declare bankruptcy, which would wipe out the shareholders, or find a “strategic” partner. I am sure a buyout would be at an excellent premium from the current under $2 share price, but probably a disappointment to stock owners with higher cost bases. From here I would rate the stock as highly speculative.
Note: I have a long position in VSE.