Why Renewable Energy Group Bought out Tyson Foods, Inc in This Fuels Venture

A worker evaluates equipment at the Dynamic Fuels renewable diesel facility. Source: Syntroleum Corporation

If you were just going off the headlines, then you may be scratching your head as to why the nation's largest biodiesel producer made a deal with a company that produces 20% of all chicken, beef, and pork in the United States. You would have to dig a little to deeper to understand the true importance and consequences of the agreement that would allow Renewable Energy Group (NASDAQ: REGI  ) to purchase the 50% interest of Tyson Foods (NYSE: TSN  ) in a 75 million gallon per year renewable diesel facility. While the acquisition will only be triggered under certain conditions, it would be another key catalyst for the long-term growth plans of Renewable Energy Group.

The (overly complex) pending acquisition
Renewable Energy Group will purchase Tyson Foods' 50% ownership position in Dynamic Fuels if and when it finalizes the acquisition of Syntroleum Corporation -- held up since being announced in December -- which owns the other 50% of the venture. When Syntroleum shareholders vote on accepting the acquisition on June 3, Renewable Energy Group will start with 800,000 "yes" votes from Tyson Foods (part of the deal). So investors need to familiarize themselves with the terms of two separate acquisitions for the same renewable diesel facility, which can be summarized as follows:

  • To acquire all of the assets of Syntroleum Corporation, including its half of the Dynamic Fuels venture, Renewable Energy Group will shell out shares with a net value of approximately $46 million. Unless, of course, new terms are agreed to at closing. 
  • To acquire Tyson Foods' 50% ownership position in the Dynamic Fuels venture, Renewable Energy Group will pay, at closing, $18 million in cash and an additional $12 million to fund repayment of Tyson's debt related to the project. Tyson Foods will also receive up to $35 million in production milestone payments through the end of 2026.
  • Renewable Energy Group will also be required to replace the letter of credit Tyson Foods obtained to capture $100 million in Gulf Opportunity Zone Bonds used to pay for the renewable diesel facility. The biodiesel producer will need to do so by the end of 2014 and may use any combination of cash and/or public or private debt financing.

In all, Renewable Energy Group will need to pay at least $46 million in stock to acquire Syntroleum, $18 million in cash to Tyson Foods upon the closing of the Syntroleum acquisition, an additional $12 million in either cash or stock to repay Tyson Foods' indebtedness, a potential cash payment or debt raise (or a low-cost financing deal with no immediate impact) to replace Tyson Foods' letter of credit, and an unknown amount to get the 75-mgy renewable diesel facility running again. The known figures total $76 million in immediate financing, which represents about $1 per gallon of fuel at nameplate capacity. Is it worth it?

Renewable diesel > biodiesel
There's a lot of confusion about renewable diesel and biodiesel, so let's clear that up. Renewable diesel is not the same as biodiesel. It's chemically similar to petroleum diesel and thus, more compatible with automobile, truck, and airplane engines. It qualifies for higher value Renewable Identification Numbers, or RINs, on a per gallon (volumetric) basis, which are sold to ensure blenders meet their required volumes of renewable fuels each year. But it is granted the same $1.00 per gallon tax credit as biodiesel. Consider the following comparison of renewable fuels:

Fuel

RINs Generated per Gallon of Fuel

Ethanol Equivalent Gallons

Biodiesel Equivalent Gallons

Corn Ethanol

1.0

1.0

0.67

Biodiesel

1.5

1.5

1.0

Renewable Diesel

1.7

1.7

1.13

Source: Renewable Energy Group SEC Filings, author's calculations

The chart above explains why oil refiners decided to purchase biodiesel RINs instead of ethanol RINs to meet their volume requirements as they approached the nation's Blend Wall for ethanol: Doing so helped them meet their obligations more quickly. It also explains why renewable diesel has been selected as a growth market for Renewable Energy Group -- it's more valuable than biodiesel.

The company would generate the same number of RINs from its pending 75-mgy renewable diesel facility as an 85-mgy biodiesel facility, which could be worth an extra $5 million-$10 million per year based on the recent range of RIN prices. In addition to a boost in RIN values, renewable diesel can be sold to a broader customer base, soon to include the massive aviation industry, than biodiesel. The acquisition would boost the company's nameplate capacity by nearly 30% from 257-mgy today to 332-mgy -- not to mention swipe away one of its potential competitors.

Source: Renewable Energy Group

I'll admit the potential acquisitions make me a little uneasy because this assumes Syntroleum Corporation's problematic-to-date technology will work. However, I trust management at Renewable Energy Group to not waste money on a lame-duck platform (it surely validated it before making an offer). On that note, the acquisition seems to be a no brainer for the long-term value creation.

Let's assume Renewable Energy Group pays up to $100 million to purchase 100% of the facility and get it to steady state operations ($76 million in known costs, $24 million in estimated unknown costs). It would be spending $100 million for 75 million gallons of annual renewable diesel production, or $1.33 per gallon. In 2013, the company generated $1.5 billion in revenue from selling 259 million gallons of biodiesel, or $5.78 per gallon.

It's a simplified way to view the acquisition, but it sure makes a lot of sense when you consider the value potential. Granted, the Blender's Tax Credit was in place last year and has yet to be reinstated this year, but there is no reason to believe it won't be reinstated in the near future.

Foolish bottom line
It's important to note that Renewable Energy Group and Tyson Foods have a substantial relationship already in place: The company sourced 83% of its feedstocks from animal fat, used cooking oil, and inedible corn oil in 2013. Tyson will continue to supply the Dynamic Fuels facility through its rendering (animal fat) business. The only thing that changes is the ownership of the facility, which would be completely owned by Renewable Energy Group. Investors are still in the dark about if or when the acquisitions will close, but I believe they can create substantial long-term value and growth if or when they do.

The government doesn't just pay biodiesel producers...
The Blender's Tax Credit is a pretty valuable subsidy for biodiesel producers; much like Social Security is a valuable tool in your financial security. However, it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.


Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 29, 2014, at 12:15 PM, duhaus wrote:

    Re; the BTC you state " . . there is no reason to believe it won't be reinstated in the near future." While I'd like to believe this could you please add some substantiating evidence to support this statement. It would seem that the exact opposite statement would be just as possible if not more so since the BTC hasn't been reinstated yet.

  • Report this Comment On May 29, 2014, at 4:00 PM, TMFBlacknGold wrote:

    @duhaus

    Yes, sorry for being vague. I touched on it in more depth, although not in detail, in a recent article:

    http://www.fool.com/investing/general/2014/04/17/can-biodies...

    First, several bills have been introduced that would reinstate the BTC for several years, rather than just a one year extension. They all seem to have support from both parties, which is key during the current election cycle (see point #2):

    http://fuelfix.com/blog/2014/04/01/top-senators-propose-tax-...

    Second, the BTC didn't expire because it was no longer needed. If that were the case, then the industry would just be whining about losing money. But it's different. The BTC expired as expected from the last extension, but was not reinstated due to political battles over budgets. The same circumstances have now led to the BTC expiring three times. Similarly, easy fixes to those circumstances have led to the BTC being retroactively reinstated in each case.

    Couple budget battles with elections and the big reductions from the EPA (might worry uninformed politicians that have to vote on bills), and you can see why the BTC hasn't been reinstated yet. I've explained why biodiesel is substantially different from corn ethanol, so a threat to one should not be considered a threat to the other. The biodiesel industry is no where near its ceiling, while ethanol is already bumping against its limit.

    Third, the BTC will be bundled into a bill for renewable energy, which will include tax credits for wind and solar, too. There are enough states that need parts of each proposed bill to make one believe that it will, in fact, be reinstated.

    Fourth, one month ago I attended the Renewable Energy Group analyst meeting and CEO Daniel Oh said "the conversation has become much more positive lately".

    Maybe it gets reinstated tomorrow. Maybe it gets reinstated one year from now. Either way, I do not believe it shouldn't affect long-term investors.

    Maxxwell

  • Report this Comment On May 29, 2014, at 4:02 PM, TMFBlacknGold wrote:

    Oops, that should read:

    "Either way, I do not believe it should affect long-term investors."

    Maxxwell

  • Report this Comment On May 29, 2014, at 4:40 PM, TMFBlacknGold wrote:

    That should read:

    "Either way, I do not believe it should affect long-term investors."

  • Report this Comment On June 02, 2014, at 11:21 AM, MNDLBRT wrote:

    I am trying to understand the 100 million bond component. Assuming REGI is paying about 82 mil total, half to Tyson & half for SYNM, are they also adding an additional 100 million in debt? In other words, is the Enterprise value of the acquisition really about $ 182 mil?

  • Report this Comment On June 02, 2014, at 5:39 PM, TMFBlacknGold wrote:

    @MNDLBRT

    The $100 million debt offering -- announced after this article was published -- will fill the requirement of replacing Tyson Food's letter of credit. So yes, an additional $100 million was just added to the cost of the total acquisition and will push REG's total debt to about $143 million.

    The terms are actually pretty favorable (2.75% interest on the notes) and REG has certain agreements in place to negate the dilution to shares (capped call transactions). I'm not sure if the debt notes are more favorable than the Gulf Opportunity Zone Bonds, but it appears that the company has thought carefully about raising the funds.

    Maxxwell

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2973654, ~/Articles/ArticleHandler.aspx, 11/27/2014 4:11:33 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement