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Reuters Edge

Ethanol firms cheap, but not cheap enough

NEW YORK (Reuters) - Ethanol companies may have lost most of their value over the last two years, but that doesn’t necessarily make them cheap for possible suitors, who may be looking for share prices to fall even further.

A process operator shows a handful of corn at the GreenField Ethanol plant in Chatham, Ontario, in this April 10, 2008 file photo. REUTERS/Mark Blinch/Files

The value of publicly-traded companies that make fuel out of corn has plummeted as much as 95 percent since 2006 and the shares of three prominent companies -- Aventine Renewable Energy Holdings Inc AVR.N, Pacific Ethanol Inc PEIX.O and VeraSun Energy Corp VSE.N -- are trading at around $2 a share or less.

But those seemingly bargain-basement prices have not yet attracted much interest from possible acquirers.

“The food-versus-fuel debate has tempered the interest of many of the likely prospects who aren’t sure if they want to get involved in an area like that when there are other areas to invest in alternative energy,” said Todd Alexander, a partner at law firm Chadbourne & Parke who has worked extensively in the biofuels industry.

“There’s also uncertainty as to where the floor is. There’s uncertainty about whether people should wait to see if they should buy them out of bankruptcy or wait until prices come down even further.”

Many industry watchers believe the companies will have difficulty in the future because their primary raw material is also an important food source.

Indeed, several investment bankers said the level of interest in the so-called first-generation ethanol companies -- those that make the fuel out of corn rather than other next generation feedstocks such as switchgrass or waste products -- has dipped sharply over the past few years, mirroring stock prices in the industry.

High corn prices have made producing ethanol barely profitable, despite the long-term U.S. mandates that require ethanol be blended with gasoline in ever-increasing amounts for more the next decade.

VeraSun is currently trading at about 5.5 times next years earnings and Aventine is trading at about 3.3 times next years earnings, according to Reuters Data. By comparison, U.S. gasoline refiners are trading at around 5 to 7 times next years earnings.

SHOPPING VERASUN

VeraSun, one of the largest pure-play U.S. ethanol companies, put itself on sale last month after taking a beating for costly contracts it signed for corn.

The company said it had received “strategic interest from multiple parties” during a secondary equity offering the company announced after slashing its third-quarter earnings forecast.

“Could a deal cross? Absolutely, but I don’t think its going to be at a very aggressive price,” said Ian Horowitz, alternative energy analyst at Soleil Group.

Horowitz said his estimates for what a buyout of the company could be worth were below the company’s current share price of $1.72 a share. Verasun went public just over two years ago at $23 a share.

American Technology Research analyst Ronald Oster estimated the company’s take out value slightly higher at between $2 and $2.50 a share.

That would value the company at $350 million to $450 million, which he pointed out was below the replacement value of the company’s ethanol distilleries and tanks.

“Plus, you’ve got to find a buyer first and its hard to find one who would be a likely acquirer,” Oster said.

Oil companies and refiners are content to buy ethanol from producers and take advantage of a U.S. tax credit. Private equity lacks access to funding, and the ethanol companies themselves are squeezed for capital.

Private companies like Poet and large companies like Archer Daniels Midland Co ADM.N that have ethanol operations might be the best bet to lead consolidation in the industry, he said.

Late last month, Poet, the largest U.S. ethanol maker, said distress in the credit markets had made it the best time “in at least five years” to buy cheap assets, and that it was looking at various opportunities.

Poet CEO Jeff Broin declined to say whether his company was looking at VeraSun.

(For more M&A news and our DealZone blog, go to www.reuters.com/deals)

Additional reporting by Matt Daily; Editing by Bernard Orr

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