It wasn’t that long ago that Sacramento’s Pacific Ethanol Inc. was running low on cash and struggling to lift its production plants out of bankruptcy. Now it’s strong enough to buy a Midwestern competitor in one of the largest takeovers by a Sacramento company in several years.
As announced last week, Pacific Ethanol is buying Aventine Renewable Energy Holdings Inc. of Pekin, Ill., in an all-stock transaction. The deal will more than double Pacific Ethanol’s production and marketing capacity and transform the once-moribund Sacramento company into the fifth largest U.S. ethanol maker. It also will significantly expand Pacific Ethanol’s geographical reach, from its current West Coast orientation to the Midwest and the East Coast.
The cost of the acquisition will depend on the price of Pacific Ethanol’s stock when the deal is completed, sometime in the second quarter. At current pricing, it will be a $160 million deal. That makes it the costliest acquisition by a Sacramento company since Aerojet’s parent GenCorp Inc. purchased Pratt & Whitney Rocketdyne in 2012 for $550 million.
Pacific Ethanol’s purchase is a testament to the company’s comeback. In recent years, as ethanol prices recovered from a severe slump, the company regained control of its production plants and whittled down debt. It earned $8.8 million on sales of $851.3 million in the first nine months of last year, the latest data available.
“With a strong balance sheet, we were able to take advantage of opportunities to grow our business,” said founder, President and Chief Executive Neil Koehler on a conference call with investment analysts this week.
The deal comes as ethanol prices have tumbled sharply of late, the result of oversupply. That’s depressed Pacific Ethanol’s stock price considerably. But Koehler said the industry is stabilizing.
“We think it’s a very opportune time” to make an acquisition, he said in an interview Thursday. “We continue to be absolute believers in the future of ethanol.”
The steep plunge in oil and gasoline prices has helped the U.S. ethanol industry by increasing fuel consumption by around 5 percent, Koehler said. Because practically every gallon of gas sold in America contains at least 10 percent ethanol, that’s increasing demand for the corn-based product, he said.
And because corn prices have tailed off, ethanol makers’ profit margins have held up even though the price of ethanol is considerably lower than a year ago, said Rick Kment, an analyst with commodities news service DTN. “It’s a manageable, stable environment,” Kment said.
Aventine and Pacific Ethanol have a lot in common besides the production of ethanol. Six years ago, both companies were victims of a bust in ethanol pricing. Aventine went bankrupt, while Pacific Ethanol placed its four operating plants in bankruptcy. At one point, three of Pacific Ethanol’s four plants went out of production.
The difference is that Pacific Ethanol made a more successful recovery. All four of its plants have reopened. Of Aventine’s six plants, one was sold last spring and another remains shuttered. The four operating plants are in Illinois and Nebraska.
“They went public shortly after we did and went bankrupt a month or two before we did, and obviously a very different tale since then,” Koehler said in the interview. “They didn’t have the strategy, didn’t have the team, didn’t have the support from lenders that we did.”
He added that, despite the recent dropoff in prices, ethanol isn’t heading into a horrible slump comparable to six years ago. “What we have today is a much more mature business, a much more disciplined business,” he said.
At current ethanol prices, the combined company will have about $1.4 billion a year in revenue. If prices bounce back to last year’s levels, as Koehler believes they will, Pacific Ethanol will do anywhere between $1.7 billion and $2 billion in annual sales.
The company will employ 365 workers, including 35 at its Sacramento headquarters.
Pacific Ethanol’s stock price remains under pressure because of the recent slide in ethanol prices. The company’s shares closed Thursday at $9 on the Nasdaq market, down 10 cents.
Call The Bee’s Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.