Ethanol maker to test IPO market this week

How much do investors like ethanol? We'll find out more Wednesday, when VeraSun is expected to hold an IPO.

Another test of Wall Street's taste for alternative energy will take place this week when VeraSun Energy holds its initial public offering.

The Aurora, S.D.-based company, which produces ethanol from corn, is expected to sell 18.25 million shares in an IPO for between $21 and $22 dollars a share. If successful, the IPO will give the 160-employee company a market cap of around $1.7 billion. The final price on the offering is expected at the end of the day on Tuesday, with public trading of the stock taking place afterward.

Interest in the IPO seems high. VeraSun initially planned to sell only 17.25 million shares for $18 to $20 a share, but on June 9 upped the price and amount of shares to be sold.

VeraSun is the second-largest producer of ethanol in the United States, with a current output of 230 million gallons per year. Planned facilities will allow the company to increase output to 340 million gallons per year by August 2007 and 560 million gallons per year by the first quarter of 2008.

In the first quarter of 2006, the company garnered $109.9 million in revenue, but only $2.7 million in net income.

After years of laboring in relative obscurity, companies touting solar energy, biofuels and other so-called clean technologies are now attracting venture capital and interest from investors.

Part of the interest comes from fears about global warming and rising fuel prices.

Alternative energy companies, however, have also seen sales grow in the past few years. Solar panels consumed more silicon than semiconductors in 2004. Rising demand for solar panels, in fact, has created a shortage of them. The technology and management behind these companies have also improved, according to Ira Ehrenpreis, a partner at investment management company Technology Partners.

"Most of what we see are science projects in this space, but in the last 24 months we've seen significant improvements in the management teams," he said at a conference last week.

Last November, SunPower, which makes highly efficient solar panels for homes and buildings, went public at $18. The company's stock now trades for around $28.

Ethanol, an alcohol made from vegetable matter, is used as a gasoline additive, but can serve as the primary fuel in some cars. It's extensively consumed in Brazil. Ethanol manufacturers have received investment in recent months from, among others, venture firm Kleiner Perkins and a venture outfit funded by Bill Gates.

If history is an indication, a successful IPO for VeraSun will help other ethanol companies garner funds. Aventine Renewable Energy, which produces and distributes ethanol, filed an S-1, a prelude to an IPO, to sell 7.75 million shares for between $37 and $41 per share. Aventine reported $935.4 million in revenue and $32.1 million in net income in 2005.

The alternative energy market, though, has its detractors. Governments provide heavy subsidies to solar and ethanol companies. These products would not currently be competitive without them. Ethanol production facilities, meanwhile, cost millions to build. As a result, a downturn in the price of gas or other factors could make ethanol uncompetitive.

In 2005, for instance, sales at VeraSun increased over 26 percent to $235.4 million. Net income, however, came to only $253,000, or about 1 percent of revenue. A perceived oversupply of ethanol, the rising price of natural gas, a loss of some governmental assistance and a 17-day production outage caused net income to drop, according to documents filed by the company with the SEC. (In 2004, the company reported $14.7 million in net income off of revenue of $194 million.)

For all the publicity, ethanol is also not yet a huge part of the world's energy diet. The world consumes about 20.4 million barrels of oil a day, and each barrel can produce about 20 gallons of gas.

Ethanol also needs to be improved. Currently, most ethanol in the U.S. is made of corn, while in Brazil it comes from sugar cane. Unfortunately, processing either material into usable fuel is not that efficient.

Researchers right now are looking at ways to produce ethanol out of superweeds and other plants that can fertilize themselves, consume less water and produce more energy per kilogram.

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