Mascoma: Inside the SunOpta acquisition

A distillation unit at Mascoma's cellulosic ethanol demonstration plant in Rome, New York

In New Hampshire, Mascoma reported yesterday that it had acquired SunOpta BioProcess, a division of SunOpta Inc. (STKL)  This combination brings together the fiber preparation and pretreatment technologies of SBI and the consolidated bioprocessing technology of Mascoma, to create a company with comprehensive capabilities for converting non-food cellulose (wood chips, energy crops and organic solid waste) into ethanol and high value co-products.

The vital statistics

According to Bloomberg: Mascoma will acquire SunOpta BioProcess for $51 million in stock. SunOpta and SunOpta Bioprocess shareholders will own 27 percent of the new Mascoma. The deal values Mascoma at $188.9 million.

The Digest’s take

Consolidation is a trend in cellulosic ethanol. That’s not surprising. Among first generation technologies, REG has been rolling up capacity in biodiesel, and companies like Valero and POET have been consolidating capacity in corn ethanol. To date, most of the combinations have been in the form of partnerships and joint ventures. The JV between DuPont and Genencor (as DuPont Danisco Cellulosic Ethanol) is perhaps the most well-known example – a case of consolidating technologies at the outset of commercialization. BP and Verenium’s tie up in Vercipia was another example. We’ve also seen a strategic investment by Petrobras in KL Energy, providing $11 million in capital towards development of opportunities in cellulosic ethanol from bagasse.

But of late, we’ve seen BP and Verenium unwind their partnership in the form of an acquisition by BP of all the assets of Vercipia. Now this combination of SunOpta and Mascoma. In the short term – a more formidable end-to-end option for commercialization. In the long term, think Brazil. We are very much aware of the opportunities in China and India, but note that both countries have infrastructure challenges related to the distribution of large quantities of ethanol, cellulosic or otherwise. Huge opportunities that will take some time to develop.

But Brazil is right there – cars in the market, distribution of ethanol is ubiquitous, and drivers are used to the mechanics of figuring out if gasoline or ethanol is a good buy for their flex-fuel cars in a given week. Plus, pipelines are in place and more are being built.

Brazil has, well, a lot of bagasse, used right now for combustion to generate renewable power for the sugarcane mills and to supply power to the grid. On a good day you get 400 Kwh per tonne of bagasse – about $40 worth of power per tonne if you have pretty good pricing. Those tonnes hold up to 100 gallons of ethanol, worth as much as $160 per tonne, plus there is still residue to burn for some residual power. That’s real upside, available to existing plants on an upgrade basis, with potentially attractive IRRs for the right technology.

To get more color on the acquisition, the Digest spoke this week with Mascoma CEO Bill Brady.

BD: How long has the SunOpta deal been in the works?

Brady: We’ve been at it for months. When I first arrived at Mascoma in January, I looked at the companies in the space, and saw some really impressive technologies. But it was too fragmented for the task at hand. I felt that for biofuels companies to succeed, we had to start putting technologies together, into larger more formidable companies.

BD: Why SunOpta?

Brady: For us, what did putting technologies together mean? Pretreatment companies. Basically, what we have in our total process is pretreatment, hydrolysis and fermentation, and distillation.  Distillation is standard, and I believe we are the best in the middle. With SunOpta, we saw the most comprehensive, most advanced pre-treatment technologies in SunOpta, and that for us was the route to the lowest cost. It turns out SunOpta’s parent was thinikng the same way. So there was some serendipity in it.

BD: For companies like SunOpta, why Mascoma?

Brady: Back to my earlier point, that there are many excellent technologies. What differentiates Mascoma is that we are addressing the most fundamental issue. We are attacking the recalcitrance cellulose. People sometimes lump us in with companies like Gevo and Amyris, which have great but very different technologies. We think the world doesn’t really change [in terms of feedstocks] unless someone unlocks the potential of cellulose. That means changing the recalcitrance. In the end, cellulose has to be at or below the cost of processing corn.

BD: What’s the immediate impact of the deal?

Brady: SunOpta BioProcess, which becomes Mascoma Canada, contributes a pipeline of revenue prospects, contributed cash on their balance sheet, and contributed technology. In turn, the company became close to the largest shareholder. In 2010, SunOpta BioProcess is on track to generate around $7 million in revemue, and has done a terrific job, for example, in developing China as a market, and has sold a couple of pieces of equipment there this year.

BD: How does this change the mid-term outlook – for example, the 20 Mgy Kinross project in Michigan?

Brady: I don’t think it affects the timeline for Kinross. It’s very positive in eyes of strategics and DOE, but it won’t directly affect our timeline. With 25 to 30 employees now working directly as experts in pre-treatment, it definitely derisks our projects even more.”

BD: What is Mascoma going to be doing in the near term towards financing its Kinross project?

Brady: The DOE loan guarantee application deadline is October 5, and we will file our application by them. Both DOE and USDA loan programs are on the radar screen, but our first hope is DOE.

BD: So many have tried the DOE route, and there’s been so little success. What do you hear from DOE in terms of biofuels projects?

Brady: The strong message we hear from doe is that they want to do projects, and biofuels projects. They need quality projects to come in. There’s been a disconnect in terms of what they see as loan-quality and what has come in the door. As much as I hate to admit it they have a lot of good points that need to be addressed. Such as feedstock, off take, and pricing assumptions.

BD: What are the keys for Mascoma in terms of moving forward at Kinross along the 2013 launch timetable?

Brady: There are three important pieces. Technology. Equity, and our off take partner, which we hope is the same company. And the loan guarantee.

BD: What are some of the longer term impacts of the SunOpta acquisition?

Brady: Mascoma has a large market opportunity in the US, but this gives us a second bite, because we can sell pretreatment equipment to competitors as well. We also have a bigger dimension, such as our activity in Alberta, and the strong support from the Canadian government which we hope to continue to have. We also have xylitol as a by product to explore. And we have enhanced opportunities in China and India, plus both companies have been active in developing opportunities in Brazil.

BD: Brazil? Have you been working on bagasse?

Brady: We have done some work in Rome and Lebanon on bagasse. I won;t say it has had the same priority as the work on hardwood, but we are definitely working on finding the right partners in Brazil to work with.

More on Mascoma – take a look at their demonstration facility in Rome, New York, here.