Renewable fuel company Gevo, Inc. announced it will acquire the ethanol production plant and carbon capture and sequestration assets of Red Trail Energy, LLC for $210 million. The all-cash deal includes an indemnity cap of $1.26 million that sets the ceiling on damages Gevo can recover from the Red Trail Energy. At .6% of the transaction value, this cap is relatively low compared to the median of 9.85% in the industry over the past decade.
“This acquisition accelerates Gevos mission to transform renewable carbon and photosynthetic energy into net-zero liquid transportation fuels and chemicals while abating carbon,” according to Gevo’s press release. The transaction, “[e]xpands the footprint and platform for Gevo for future alcohol-to-jet [sustainable aviation fuel] at an operating site with existing low-carbon ethanol supply.”
Ethanol has been used to power engines for nearly two centuries. Nicolaus Otto, inventor of the modern internal combustion engine, used ethanol to power an early engine and the biofuel even powered fueled Henry Ford’s Model T. Ethanol was first blended with gasoline in the 1920s and became increasingly popular as an additive during the fuel shortages of World War II.
Worldwide Ethanol Production
Modern ethanol production skyrocketed starting in 2005 when Congress required that the biofuel be added to the U.S. fuel supply. The goal of the legislation was to make the nation less dependent on fossil fuels and instead rely on corn and other crops grown domestically. The Energy Independence and Security Act of 2007 then expanded renewable standards, leading an increasing number of farms to focus on corn production to fuel the surging demand. The U.S. is now the leading producer of ethanol. Brazil, which primarily uses sugar cane to produce ethanol, is the second largest producer and leading exporter – sending 47% of all exports to the U.S.
During the Covid-19 pandemic lockdowns, fuel use plummeted, causing approximately 75% of ethanol plants to shutter or operate at reduced capacity. Ethanol production bounced back as fuel demand returned in 2021 and the U.S. federal government has passed additional measures to support the industry and require ethanol’s use.
Some industry analysts question whether ethanol’s future growth will remain robust. With the increasing popularity of electric cars, demand for gasoline is projected to dip – and ethanol along with it. “We have reached an interesting inflection point within liquid fuels,” according to Ben Brown, agricultural economist at the University of Missouri, “The pie is no longer growing.” Companies have grown reluctant to invest in new plants as ethanol demand wanes.
According to DealPulse’s M&A database, which harnesses both AI and attorneys to digest the granular deal points of publicly announced transactions, Gevo is advised by law firm Faegre Drinker Biddle & Reath LLP and Red Trail Energy is advised by BrownWinick Law Firm.
