Mega Deals are Signs of Weakness
Although mega deals are usually good for stock market sector pricing, they aren’t typically positive for sector economics unless you have a dumb seller and dumb buyer. As one of my associates at Lehman Brothers once said, “The Acquirer wants the Acquiree at a low price and the acquiree usually trades at a low price because of sector economics.” Now enter the institutional investor who loves to bet on sector consolidation in which we are now seeing in the ethanol sector. Expect a move upward for ethanol stocks.
Enter VeraSun Energy Corp, which announced that it will acquire US BioEnergy Corp. for $700 million. The deal is announced as the industry faces inventory problems as well as pressure from activist groups protecting agricultural pricing and environmental issues.
Besides subsidies that Congress has given ethanol producers, Congress is considering increasing the mandate for the number of gallons of ethanol that the oil companies are required to use. Excess inventories and increases in corn prices have helped dampen the enthusiasm that we saw for ethanol companies just a year ago.
Donald L. Endres, Chairman and Chief Executive Officer of VeraSun said, This merger is an opportunity for two leading companies in the renewable fuels industry to capitalize on synergies and provide value for shareholders.
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