Tyson Foods to sell its stake in Dynamic Fuels

Tyson Foods is getting out of the $150 million Dynamic Fuels venture the company spearheaded beginning in 2007 and has not lived up to its potential. The plant sitting, which has sat idle since November 2012, won’t be Tyson’s Foods’ problem much longer as the meat giant has agreed to sell its 50% stake to Renewable Energy Group for an estimated $65 million.

The payout will come in three ways, with a release of Tyson’s liability on the outstanding debt used to build the plant. Tyson would receive $18 million in cash at closing with $35 million in future payments which are tied to production over 11.5 years. Tyson also wants to collect $12 million at closing for outstanding loans made to Dynamic Fuels.

“Selling our interest in Dynamic Fuels to REG provides capital for Tyson to redeploy into other opportunities,” said Andrew Rojeski, vice president-Renewable Energy for Tyson Foods. REG is a long-term customer of ours, buying fats, oils and greases to make renewable fuel, and we hope to continue that relationship.”

DEAL SPECIFICS
This deal is contingent upon the closing of REGs December 2013 announced agreement to acquire substantially all of the assets of Tulsa-based Syntroleum Corporation would give REG full ownership of Dynamic Fuels and its 75-million gallon per year nameplate capacity renewable diesel biorefinery in Geismar, La.

A portion of the development and construction of the Geismar biorefinery was funded by $100 million in Gulf Opportunity Zone Bonds, issued through the Louisiana Public Facilities Authority. Tyson Foods also wants REG to replace the letter of credit the meat giant obtained to support issuance of the bonds or refinance the debt prior to Dec. 31, 2014 on terms acceptable to REG.

Syntroleum’s shareholders will vote June 3 to accept or reject the proposed acquisition by REG. Syntroleum executives noted in their recent proxy filing that it is likely looking at bankruptcy liquidation given its thin capital levels if shareholders do not approve the merger with REG.

REG said it may seek to use existing cash on hand and/or one or more financing vehicles, including public or private debt or equity, to satisfy this condition. 

“Upon closing, this is another milestone for REG in growing our core advanced biofuels business, said Daniel Oh, REG president & CEO. It gives us the opportunity to further expand our production capacity into new product lines, while growing our overall advanced biofuel manufacturing capability, and bringing on other renewable chemical applications.”

DYNAMIC FUELS HISTORY
The Dynamic Fuels venture came during a different era at Tyson Foods under the leadership of former CEO Dick Bond who sought to capitalize on federal tax credits which were fueling investment into biofuels — including corn-based ethanol which was driving up feed costs for Tyson Foods.

Tyson announced two fuel partnerships during the Bond era, Dynamic Fuels and a venture with ConocoPhillips. The Houston-based oil company partnered with Tyson Foods in April 2007 to make renewable diesel from animal fat and byproducts. This venture had the capacity to generate 175 million gallons of renewable diesel annually. The venture was to add between 4 to 16 cents in accretive earnings for Tyson Foods, once operation began in late 2007. The venture folded in mid 2009, when the $1 per gallon federal credit was slashed to 50 cents, which no longer made the venture economically viable.

Tyson continued its venture with Syntroleum to build its own processing facility, seeking to control more of the production after having limited say in the ConocoPhillips partnership. Tyson and Syntroleum formed Dynamic Fuels in 2007 as a 50/50 joint venture. The Geismar facility, completed in 2010, was the first large scale renewable diesel biorefinery built in the U.S.

The plant has been idle since November 2012, costing each partner $1 million per month to keep it in standby mode. Aside from the $1 million cash burn per month, Ron Stinebaugh, executive with Tulsa-based Syntroleum, estimated in December the plant had lost out on roughly $20 million in potential sales as the partners could not agree on restart terms.

The venture, despite all its potential, has been a money pit for thinly capitalized Syntroleum. For the quarter ended Sept. 30, 2013, Syntroleum reported a loss from Dynamic Fuels of $3.5 million. This compares to a loss of $3.3 million for the quarter ended June 30, 2013, while the plant has been on standby mode. There is a three month lag in the Dynamic Fuels report compared to Syntroleum’s regular reporting.

Tyson came under new corporate leadership in January 2009, when CEO Bond exited the company. Former board chairman Don Tyson, also the company’s largest investor, sought new direction for Tyson Foods which returned its focus to improving chicken operations, and less time chasing tax credits.

Donnie Smith assumed the Tyson CEO role in November 2009, from Leland Tollet who came out of retirement to serve as interim CEO following Bond’s sudden exit. Smith made it clear from the beginning that Tyson would be focused on growing its own business by being best-in-class in poultry. He said the company would not make excuses about grain costs, but it would look for ways to grow its own margins through more value-added sales. In this new Tyson era, the Dynamic Fuels venture took a back seat to the company’s core business.

Tyson Foods shares slid lower on Wednesday, May 21 trading at $39.93, down 70 cents  in the early session. Renewable Energy Group shares rose 2% on the news to $10.25 while Syntroleum’s stock jumped nearly 5% to $3.41.