Renewable Energy Group Completes Acquisition from Tyson Foods. Now What?

The nation's largest biodiesel producer just got bigger -- a lot bigger. In fact, the annual nameplate production capacity of Renewable Energy Group (NASDAQ: REGI  ) will receive a 30% boost once a recently acquired facility formerly owned by Syntroleum Corporation and Tyson Foods (NYSE: TSN  ) begins operating on all cylinders. Moving from 257 million gallons per year to 332 million gallons per year is not the only benefit: the facility produces renewable diesel (a second generation biofuel), which is more valuable than biodiesel (a first generation biofuel) when addressable markets and multiple government incentives are taken into account.

The national network of Renewable Energy Group has expanded rapidly in recent years. Source: Renewable Energy Group.

Now that both deals are completed, Renewable Energy Group has created a subsidiary named REG Synthetic Fuels, which will house the 186 filed patents from Syntroleum, be responsible for the partnering and sales of current and future products related to the technology platform, and serve as a destination for future potential acquisitions in the same category. Tyson Foods has also relinquished ownership of a renewable diesel facility -- and the debt that came with it -- to focus its efforts elsewhere. After months of anticipation (the acquisition offer was originally announced in December 2013), what should investors expect?

Syntroleum acquisition
This deal closed on June 3 at the Syntroleum shareholder meeting. Renewable Energy Group paid less than 3.5 million shares to acquire all of the company's assets. That's down from a 3.8 million share figure, and represents an acquisition cost at least $10 million lower than the dollar figure initially announced in December, if current market prices are involved in the transaction. I assume that's derived from the ability of Renewable Energy Group to reduce its offer if "less than $3.2 million in cash" was transferred during the transaction.

Right now, the company is focused on bringing the Dynamic Fuels facility to steady-state operations and full production of 75-mgy. However, there was a dizzying amount of intellectual property acquired during the deal. That doesn't mean all of it was valuable, but REG Synthetic Fuels will surely look to expand its operations and product offerings beyond the Dynamic Fuels facility in the future.

Tyson Foods acquisition
This deal closed on June 9 and gave Renewable Energy Group 100% ownership of the Dynamic Fuels facility, which was renamed REG Geismar. CEO Daniel Oh announced that work had already begun to bring the facility online. To close the deal with Tyson Foods, the biodiesel leader completed the following tasks:

  • Paid approximately $16.5 million in cash to Tyson Foods.
  • Retired $13.5 million in Tyson Foods' debt related to the facility.
  • Agreed to pay up to $35 million to Tyson Foods when the facility meets certain production milestones.
  • Agreed to replace or redeem $100 million in Gulf Opportunity Zone Bonds purchased by Tyson Foods related to the facility.

The last bullet point occurred after my last article in the form of a $143.8 million debt offering by Renewable Energy Group. The 2.75% convertible senior notes are due 2019 and convert at a price of $13.26 per share. However, Renewable Energy Group has entered into privately negotiated capped call transactions with buyers for approximately 92.5% of the notes offered. What the heck is a capped call transaction? Essentially, it's an agreement that reduces dilution to shareholders through several means, including moving some of the transactions to secondary markets (not the market you and I buy and sell shares on). Along with the low interest rate attached to the notes, this demonstrates the financial strength of Renewable Energy Group and its continued commitment to growth and shareholders.

Foolish bottom line
Investors will have to wait for production updates from Renewable Energy Group concerning the 75-mgy renewable diesel facility at REG Geismar, but you can finally rest knowing the deal is complete. A positive side effect of the acquisition is that the company now has $43.8 million in extra cash from its recent offering -- most of which will contribute to the Tyson Foods deal. While Tyson Foods will continue to supply the facility with feedstock, it is no longer weighed down by owning a business that lies outside of its expertise. That will allow it to focus on growth in its core areas of strength, such as its recent $8 billion acquisition. All around, this is a win-win for shareholders.

Acquisitions pay dividends -- and so do these companies
Tyson Foods has paid a dividend since 1987, but it yields less than 1% today. What gives, man? Knowing how valuable dividends can be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (6) | Recommend This Article (0)

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 June 19, 2014, at 1:37 AM, paolopiace wrote:

    Maxx: so, Syntroleum is receiving 3.5M REGI shares, newly issued, that are going to dilute the outstanding 38.8M. And the current REGI price reflects that dilution. Right?

  • Report this Comment On June 19, 2014, at 10:54 AM, TMFBlacknGold wrote:

    @paolopiace

    The 3.5 million shares issued will dilute the previous outstanding share total by 9%. The market is also reacting to the debt note offering, which has the potential to dilute shareholders as well, although it is unclear how severe that will be given the capped call transactions.

    However, the net book value for the company was $620 million on March 31. If you factor in the acquisitions and transactions that number has either remained the same or increased, depending on how REG values Syntroleum and the new renewable diesel facility. So the company is still undervalued simply based on net book value. I like to factor in the future growth potential, too, which makes the current valuation even more attractive in my opinion.

    Maxxwell

  • Report this Comment On June 19, 2014, at 4:10 PM, abinorm2 wrote:

    As a holder of the now de-listed Syntroleum, what value do those shares now have? Will they get some of the 3.5 million shares given to SYNM by REGI?

  • Report this Comment On June 19, 2014, at 4:10 PM, abinorm2 wrote:

    As a holder of the now de-listed Syntroleum, what value do those shares now have? Will they get some of the 3.5 million shares given to SYNM by REGI?

  • Report this Comment On June 19, 2014, at 5:56 PM, TMFBlacknGold wrote:

    @abinorm2

    I'm not sure if $REGI shares will be distributed to shareholders, but that's usually how acquisitions work. It won't be a 1-to-1 exchange if it does occur, however.

    Maxxwell

  • Report this Comment On June 25, 2014, at 1:14 PM, VP1983 wrote:

    As a holder of the new de-listed Syntroleum, What would we get? There is nothing on company site. I hope they could share some news regarding the same for the share holder of SYNM.

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: 2997069, ~/Articles/ArticleHandler.aspx, 9/1/2014 10:48:15 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