Syntroleum outlines acquisition upside

Shareholders of Tulsa-based Syntroleum Corp. were encouraged Wednesday (Dec. 18) to approve the proposed $40 million acquisition by Renewable Energy Group. They were told to expect a payout equaling $4.04 per share, a 37% premium over the company’s 10-day average price.

The stock price rose 36% to $3.34 in active trading on Wednesday (Dec. 18.) with more than 1.08 million shares trading hands, roughly 10% of it’s total outstanding diluted shares.

CEO Gary Roth told shareholders at the company’s annual meeting Wednesday that after extensive review the pending deal with REG will provide the best value proposition for investors given the upset potential of the combined operations.

During the meeting company execs fielded several questions from investors about the fairness of the price offering at this time. Just five months ago on July 17, the Syntroleum shares were trading at $7.55, as there was great hope the company’s joint venture with Tyson Foods Inc. would restart their renewable fuels plant in Geismar, La.

The Dynamic Fuels plant in Geismar has been idle since November of 2012, costing each partner $1 million a month as it sits in standby mode. Syntroleum execs estimated the plant has lost out on roughly $20 million in potential sales given the two partners could not agree on restart terms.

Ron Stinebaugh, senior vice president of finance at Syntroleum told shareholders that this deal was the best offer on the table and together the companies could benefit from the marriage.

The proforma company would have a capacity of 294.5 million gallons of production next year, which would include 50% of the Dynamic Fuels facility should it be up and running by then. Together the firms have patented technology and a sound refining and distribution channel for a wide range of feedstocks.

Stinebaugh said once the deal is approved, the Dynamic Fuels parties will sit down and discuss possible restart strategy. The cost to restart the Geismar plant is an estimated $20 million, based on feedstock prices.

Tyson Foods has no comment on the plant restart or the sell of Syntroleum at this time.

SPIN DOWN
Stinebaugh once the sale is approved by shareholders sometime early next year, Syntroleum will begin its spin down of operations and it will be retaining some $5.3 million to retire existing obligations, not being acquired.

He said if for some reason, more money is required that could impact the actual payout to investors. At this time, Syntroleum investors are expected to receive a 0.3809 shares of REG stock in exchange for each of their Syntroleum shares.

Stinebaugh said the share conversion would take place late in the first quarter of 2014, after a proxy vote and share offering from the two companies.

POTENTIAL UPSIDE
Syntroleum has a market cap of roughly $33 million with 10 million outstanding shares. REG has a market cap of $404.6 million with 37 million shares outstanding. REG closed Wednesday at $11.10, up 5%.

Analysts at Cannacord Genuity called the deal “positive, but risky.” The all-stock deal would diversify Renewable Energy into the “next generation” of renewable diesel. Production at Dynamic Fuels, the joint venture with Tyson, has been hampered by feedstock, catalyst, and equipment failures, the analysts said.

Cannacord has a price target of $14 on REG.

Analysts with Raymond James & Assoc. said the deal is a rare instance of corporate M&A in the U.S. biofuel industry. Buying individual plants and strategic partnerships have been far more common.