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Investors Sweet on Second-Gen Biofuel IPOs But a Few Caveats Remain

Second-generation biofuel IPOs are all the rage this year with recent deals pricing well above initial expectations and a growing number of companies expected to tap the capital markets in coming months. But analysts caution some of these companies will have a hard time wooing investor interest unless they become more transparent about their accounts and future path to profitability.

"None of these companies will be earning much any time soon so investors want to see clarity and visibility about the enterprise story behind the companies," says Stacey Hudson, an analyst with Raymond James. "If they have a strong story and the right technology, there is definitely appetite out there. Investors have become more comfortable and knowledgeable for second-generation biofuel companies."

Certainly, investors have been keen to bankroll the latest IPO’s, sending their post-IPO valuations sharply higher. Late last month, algae-for-biofuels firm Solazyme priced its IPO at $18, the top of the initial price range and saw its shares jump 15% on its trading debut, raising $227m.

Rising Value

The last two deals before it - Gevo and Amyris - have seen their stock increase 32% and 83% respectively. Others including Codexis, Metabolix and Syntroleum, also performed well, helping the second-generation biofuels sector boost its market capitalization to $3.8bn in the past 14 months.

Eager to profit from this momentum, investment banks are scrambling to price deals before market sentiment changes with one senior IPO banker saying his firm is working on at least 18 potential deals. So far, however, the only well-publicized IPO hopefuls include Petroalgae, Ceres, Myriant and Kior. Hudson expects Kior will do well because it has a "strong technology" and uptake partnerships. However, she says Petroalgae, which has been hoping to IPO since last year, may struggle because of "some week elements in its business model."

Caroline Taylor, an analyst at the Energy Biosciences Institute in Berkeley, says Ceres has a good strategy because it is a feedstocks company.  She said that establishing the feedstocks for advanced cellulosic fuels is crucial for commercial development, given that the largest cost associated with production is for the feedstock.

Standing Out in the Crowd

In the biofuels game, having an economically feasible business model is crucial at a time when many firms are struggling to make money amid soaring feedstock costs and falling oil prices. Kior's core business is transforming non-food biomass into so-called renewable crude oil that can then be refined to make a variety of gasoline and diesel blends. It says it can sell its crude oil at a much lower price than biofuel, which typically sells at $3-4 a gallon.

Meanwhile, Ceres, which hopes to raise as much as $100 million to expand its output of genetically modified crops to make biofuels, says it is developing sweet sorghum as an alternative to sugarcane to make biofuels. It is also working to improve corn and soybean yields as well as making other crops that can better tolerate drought and salt. Ceres also has some high-powered partnerships in place, including Monsanto, which is helping it research and develop some of its products.

Myriant, which is also eyeing some $100m in its flotation, makes "biocatalyst" technology for the conversion of renewable feedstocks into special chemicals including succinic acid. Petroalgae, meanwhile, sells a technology it claims helps improve the growth and harvest rate of plant micro crops or algae to generate proteins that can be used to make biofuels, animal feed and human food. While it hoped to IPO last year, the company has struggled to find the right window to come to market. Some say it's failure to attract investment from ExxonMobil, which sunk $600m into algae-to-biofuels rival Synthetic Genomics in July 2009, raised questions about the value of its technology.

Showing just how crucial technological differentiators have become in the industry, observers said Solazyme's success was primarily due to it's ability to grow algae in fermentation tanks without sun or photosynthesis processes, which are used by most rivals. In a recent report analyzing the upcoming IPOs, Raymond James states technology will be a make-or-break factor for the success of future second-gen biofuel IPOs. But so will other factors including a clear proof of concept, roadmap to profitability, strong strategic partners and adequate and inexpensive access to feedstock.   


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Volume 18, Issue 4


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