Stora Enso acquires Virdia in (up to) $62M deal

For $33M upfront and $29M in incentives for meeting milestones — Stora Enso acquires renewable sugars pioneer Virdia — the former HCL CleanTech — as the Finnish giant hones its biobased strategy.

We look at the Virdia story, and Stora Enso — in search of The Bottom Line.

In Finland, Stora Enso said that it has acquired Virdia for $33 million with additional potential payouts totaling approximately $29 million following completion of specific technical and commercial milestones by 2017.

Founded in 2007 as HCL CleanTech, Virdia developed the CASE process, which converts cellulosic biomass to high quality fermentable sugars and lignin using acid hydrolysis (the HCL in the company’s former name referred to ‘hydrochloric acid’).

Applications for low-cost cellulosic sugars range from renewable fuels and fuel intermediates, including diesel, jet fuel, ethanol and butanol; renewable chemicals and materials such as biosurfactants, lubricants, plastics and synthetic rubber; and nutritional additives such as baker’s yeast and amino acids for the animal feed industry. Virdia’s CASE process also produces lignin in dry or soluble forms, which has proven to be feedstock for plant-based plastics and other thermo-chemical transformations.

The differentiation point

Acid hydrolysis has been around for a long time – the original, known process goes back to World War Two. Virdia’s core technology is in the complete recycle of the acid – extracting the acids from the sugar stream so that it can be re-used. Other advantages are the cost-competitiveness and high purity of the output.

As a result, CEO Philippe Lavielle told the Digest in 2012 that “We are competitive with $4 bushel corn dextrose sugars, and we think we have a stronger long term position than companies producing dextrose. The long term price for sugars will depend on the market segments, but we see that 15 cents a pound is like a threshold. The question for all of us is ‘can we make it work at 15 cents?”

“Pulp wood and hardwood substrates are available in mass quantities today,” said Lavielle, “and that makes them the feedstock of choice for today. Our process has access to those materials and it will be some years before the enzymatic route is competitive there.

“Our CASE process has yields of 95-97 percent of the available sugars, both C5s and C6s, and by producing C5 sugars such as xylose, it gives you a very valuable product stream for producing furfural or xylene chemistries. By contrast, if you can of 80-85 percent with enzymatic process today, you are doing well.

Virdia’s progress

The company proceeded as far as construction of a pilot plant, which opened in Danville, Virginia in 2012. In 2012 when he came aboard, Lavielle told the Digest that the company would build, own and operate its first plant, and after that the company would pursue other business models including licensing its technology. Lavielle told the Digest in 2012 that financing for the first plant was complete and the company will have a finalized engineering package complete in September. Following that, it would take 18 months to build, and the company expected to have its first commercial facility open in 2014.

Scale? Lavielle said that, for its first commercial plant, the company is pursuing a 150,000 tonne and a 50,000 tonne project – the latter option was “not optimal financially,” but would demonstrate the technology.

The investment group

It is not clear at what stage discussions with Stora Enso turned from partnership or strategic investment to outright acquisition, but it was clear the venture investors Burrill & Co and Khosla had taken the technology as far as they could.
The two ventures capital firms had announced their investment in HCL CleanTech back in 2009, as part of a $5.5M Series A investment round.

“Basically, the Company tackles the pre-treatment and hydrolysis step all at once, without use of enzymes,” said Burrill & Company Director, Greg Young. “Accessing cheap sugar locked in biomass is one of the greatest challenges now faced by those pursuing renewable fuels and chemicals. HCL CleanTech’s technology represents a step change in accessing these sugars, and drops into the pretreatment step of any fermentation-based process or chemical reforming technique which starts with oligosaccharides. We are eager to see this proven at scale, at which point it becomes immediately relevant to adjacent industries aiming to use biomass as a feedstock.”

Burrill & Company and Khosla Ventures were joined in the Series A round of financing by Zohar Gilon, the lead seed investor, and the founders.

Good deal for the investors?

Although Virdia had announced “$100 million” in financing in 2012, $75 million of that was in the form of low-interest development loans associated with a first commercial project, from the state of Mississippi. (the state also provided up to $155 million in various tax incentives over a 10-year period). The company raised $20M in a Series B round from its existing investors and Tamar Ventures,

The company also secured $10 million in venture debt from Triple Point Capital and landed several high-profile grants along the way. Chief among these, $900,000 to Virdia and Virent to support Virent’s conversion of Virdia’s pine tree sugars into drop-in biofuels. In 2011, LS9 and Virdia picked up a $9.0 million grant to develop and demonstrate process improvements for pretreatment, conversion to sugars, and subsequent conversion of those sugars to fuels.

Following the completion of the BIRD project, the Digest asked the partners about next steps. “Commercialization,” said Virdia CEO Philippe Lavialle, flatly. In terms of produced approved jet fuel, Virent’s Cortright added, “We will need input from the OEMs, and we will go through the ASTM process, same as the oil-based fuels. It will take a couple of years.” Given the timelines for fuel certification and the scale-up steps for commercialization, Virent is indicated that 2017 to 2020 is the expected timeline for “world-class scale.”

Before doing so, however, Virdia has come under the wing of Stora Enso and ceased to be an independent company.

In all, the company raised some $25.5 million in known venture funds, and tapped $10 million in venture. debt. It look very much as if the acquisition made the original investors whole — or close to it — with an upside kicker in the additional $29 millionin incentives for hitting targets through 2017.

Stora Enso’s Biomaterials Division

Stora Enso says that the acquisition is a new step in implementing the Division’s strategy, following the recent lignin extraction investment at Sunila Mill in Finland.

“This acquisition is in line with our strategy of growing in bio-based chemicals, ingredients and solutions, building on cost-effective, non-food-competing raw materials. These solutions will contribute to a more sustainable future by replacing fossil-based materials in various applications with renewable and cost-effective choices. We are now investing in a new technology platform that will enable us to reach new industries and value chains, and create significant sustainable profit growth for our company,” says Juan Carlos Bueno, EVP, Stora Enso Biomaterials.

Last July, the company said that it wouldwill build a biorefinery at their Sunila pulp mill in southwest Finland, investing 32 million euros for the project. The plant will be up and running by late 2015, and will create turnover of 80 million euros per year. Stora Enso hasd been looking into the lignin business even back then, anticipating an ability to sell the polymer for speciality chemical and high-tech material manufacturers.

Prior to 2012, Stora Enso was developing a biodiesel plant project with Neste Oil, but the partners decided not to progress with their plans, for which the two companies had applied for funding under the EU’s NER 300 program. The European Commission recently published a review on its Web site of projects that have applied for NER funding, and Neste Oil’s and Stora Enso’s project is not among those listed as scheduled to receive funding.

The Bottom Line

Finding strategic investors who combine vision, operational experience and sufficient capital to carry out an investment program — that’s never easy, and there’s no tougher time than now. So it’s notable that Virdia has found such a partner. Although the transaction severely caps the upside for the early-stage investors — they might surely welcome some M&A activity to sharpen their own portfolios and yet position Virdia with a strong parent to take it forward.

For Stora Enso — a technology to extract fermentable sugars cost-effectively from their ample forest resources — that’s a key platform for uncovering upside potential in fuels and chemicals. Studying the landscape, they’ve decided to become an investor rather than a customer — says good things about Virdia’s technology, while sending a clear signal that affordable cellulosic sugars are still not so broadly available that acting strictly in a customer role is a viable option.