This Biodiesel Company Now Owns Vion Ingredients: What's Next?

It's official, Fools: On Wednesday, Darling International  (NYSE: DAR  ) successfully completed its largest acquisition to date.

Darling shelled out 1.6 billion euros (that's just more than $2.17 billion) in cash to acquire Vion Ingredients, formerly a subsidiary of Netherlands-based Vion Foods.

Of course, Darling's entire market capitalization sits at slightly less than $2.5 billion, so it's obvious the rendering and biodiesel specialist didn't exactly have more than $2 billion in its coffers for such an enormous purchase. As a result, Darling primarily funded the deal through a combination of unsecured debt and a 40 million share offering of common stock.

Unsurprisingly, those moves drew the ire of Moody's last month, which sent shares tumbling after the credit ratings agency downgraded Darling's Corporate Family Rating -- a decision made thanks both to Darling's newly weakened credit metrics and execution risks associated with the transaction.

Even so, I went out on a limb last month to argue Darling's risks pale in comparison to the benefits of expanding its international reach through Vion Ingredients. After all, Vion's business is a shoe-in with Darling's core rendering operations through its focus on creating value from slaughter industry byproducts. Namely, according to Vion's website, that value arrives in the form of "high quality ingredients in such highly diverse markets as pharmaceutics, cosmetics, food, feed, energy, and technology."

But perhaps most compelling given Darling's Diamond Green Diesel joint venture with oil giant Valero (NYSE: VLO  ) Vion Ingredients boasts a history of investing "in innovative, sustainable processes such as the production of biofuel and biophosphates."

Here's what's next
So what can Darling shareholders look forward to now? Gradual deleveraging, for one.

Lucky for investors, the $500 million Darling took on in unsecured debt comes in the form of 5.375% notes due in 2022. That gives it plenty of time to get its financial house back to more normal levels, and to prove to investors and ratings agencies it can successfully integrate the two businesses' operations. 

In addition, Vion Ingredeients' already solid business should help take away some of the bite; For the trailing 12 months through June 30, 2013, Vion reported revenue of approximately $2.29 billion, with EBITDA of $285 million. And in fiscal 2012, Vion Ingredients achieved sales of $2.17 billion, with EBITDA of about $271 million. By comparison, Darling reported EBIDTA of $317 million on sales of $1.7 billion over the same period.

Better yet, remember that when Darling announced the acquisition three months ago, CEO Randall Stuewe was quick to note that the company expects it to be immediately accretive to Darling's adjusted earnings per share.

Finally, remember that production is still ramping up for Diamond Green Diesel, which Darling and Valero only just brought up and running last July after two full years of preparation.

But that's not to say Diamond Green Diesel hasn't had it's own hiccups. Though the third quarter represented DGD's first full quarter in operation, Darling and Valero were forced to temporarily reduce production in the fourth quarter to replace some troublesome equipment that was causing "excessive metallurgical wear" in the plant's primary heat exchanger. But despite the troubles, Darling's share of the DGD equity and net income still managed to contribute $12 million last quarter.

Going forward, Darling has indicated the plant should have returned to nameplate capacity by mid-November, at which point it would get back to generating roughly 9,300 barrels of lucrative biodiesel per day. 

That's why, given their new source of materials overseas and once Darling and Valero have finally worked out all the kinks in their joint operation, I wouldn't be surprised if they soon turn their attention to further expanding their reach in the biodiesel industry.

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