In ADM's Bio-Bailout, Red Flags for Recent IPO Darlings

NEW YORK ( TheStreet) -- Fortunes shift quickly for IPO darlings, and that's been the case with bioproducts companies that successfully went public in the past two years. Their stocks have crashed, in some cases, spectacularly so.

Now, an announcement from Archer Daniels Midland ( ADM) that it's bailing out of a bioplastics joint venture -- it was going to use ADM agricultural feedstock to make bioplastics that would replace petrochemical products -- highlights that it's not just the stock values of bioproducts plays that can falter, but the funding and support for small bio companies from big balance sheet partners.

That's a red flag that has always been inherent in making a bet on the bioproducts class, but as of yet, hadn't been exposed in a publicly traded bioproducts company.

Shares of ADM's jilted bioplastics partner Metabolix ( MBLX) fell by 55% on Friday -- the termination of the joint venture was announced after the close on Thursday.

Shares of other recent bioproducts IPOs weren't impacted by the ADM bailout, but these companies have all fallen far from their IPO prices already. KiOR ( KIOR) is down 34% since its 2011 IPO. Gevo ( GEVO) is down 65% since its 2011 IPO. Amyris ( AMRS), down 35% since its Oct. 2010 IPO. Solazyme ( SYZM), down 48% since its June 2011 public offering.

All of these bioproducts IPOs had one trading theme in common: They were great for a deal flip, and that's about it. Shares of each of these stocks went higher immediately after the IPO pricing, only to eventually fall to an even greater degree than they rose, and they are still years from sustainable revenues and proven large-scale commercialization.

There are between 10 and 12 bioproducts companies still in the IPO pipeline at the start of 2012, but given the performance of the most recent offerings, it is hard to imagine a big crop of bio-IPOs making it this year.

ADM has now given investors another reason to be wary of Wall Street's efforts to take these companies public.

"I think it is relevant to all deals. I think there will be a lot more scrutiny of the 10-12 deals filed in this space right now," said Stifel analyst Jeff Osborne.

Andrew Soare, a bioproducts analyst at Lux Research said that of the dozen or so deals in the IPO pipeline, he believes only two have a legitimate shot of making it public this year. At least, he believes only two should be given a shot based on business fundamentals: Elevance Renewable Sciences, which filed in September, and BioAmber, which filed in November 2011.

Yet even in these cases, Soare says that the surprising ADM bailout can't be ignored and it will make the IPO market tougher for all.

"There is a lot of risk. ADM has invested a lot of money. They didn't just put their name on a piece of paper and for them to walk away it's a big thing. I do think there is risk to all of these relationships and it's a risk that would not leave the small companies in a good position," Soare said.

One of the main selling points of all of these IPOs has been the big name partners they bring to the table -- and into the IPO prospectus -- from Big Oil players like Chevron ( CVX) and Total ( TOT) to the chemicals market giants like Dow Chemical ( DOW), products companies like Unilever ( UL), and agricultural giants like ADM and Cargill.

There's a simple reason why the bioproducts IPO boom has involved so many big companies across so many core sectors of the economy: a barrel of oil doesn't all go to producing gasoline. In fact, only 19.3% of a barrel of oil is made into gasoline, with the rest of a barrel ending up in diesel and other petroleum distillates, jet fuel, heating oil, liquefied petroleum gases, and a category that the Energy Information Association classifies as "other products."

Elevance Renewable Sciences, though, shows some of the primary risks even if a bioproducts company is targeting more than one end market. Elevance is planning a massive biorefinery that can convert agricultural feedstocks into biofuel and biochemical products. It lists as major partners Dow Corning, Cargill and Wilmar, a major argricultural feedstock producer like ADM and Cargill.

ADM's exit from the market shows the risk inherent in support from an agribusiness feedstock provider. Cargill is also behind one of the prime examples in the bioproducts space of a company that has never been able to hold onto its major corporate partners: NatureWorks.

NatureWorks began as a joint venture of Cargill and Dow. Dow left in 2005. Then a Japanese partner, Teijin, came on board in 2007, only to bail in 2009. Late in 2011, PTT Chemical of Thailand took a 50% stake, Cargill's third major partner in NatureWorks. One fact that distinguishes NatureWorks from the other companies, though, is that it has never filed for an IPO.

To show how far short of ambitions the ADM-Metabolix venture fell when ADM pulled the plug, the agribusiness giant had forecast a Metabolix plant that would produce 110 million pounds of a bioproduct replacement molecule for polyethylene when the plant opened in December 2010. It never even hit the 1 million pound production milestone.

Analysts of the market noted a few key features of the ADM deal that distinguish it - in a bad way - from the rest of the bioproducts sector. Metabolix was depending on ADM for the feedstock in its bioproduction, therefore, it is now left scurrying for a replacement feedstock provider, in a market where as many as 50 to 100 companies are vying for feedstock sources -- the same risk Elevance would face if Wilmar decided to bail on it.

KiOR, too, is depending on one company, Catchlight Energy - itself a Chevron venture with lumber giant Weyerhauser ( WY) - for its feedstock.

Second, ADM-Metabolix was targeting a niche market of bioplastics, and creating an entirely new molecule as opposed to a "drop-in" replacement. KiOR, in targeting the fuel market specifically, has left itself open to more risk than players like Solazyme or Gevo, which are looking to not just develop crude oil "drop-in" replacements, but petrochemical drop-ins, jet fuel, and bio-based consumer product packaging.

Further, ADM is an "upstream" partner - meaning it's providing the feedstock as opposed to the end market for the bioplastics. Big Oil companies like Total and Chevron, on the other hand, have stronger relationships in the eventual end markets for bioproducts.

"Total and others are using a shot gun approach for the bio chem/fuel market, while ADM hadn't done much other than ethanol and biodiesel," said Osborne.

"They don't have the pull of a chemical or oil giant," Soare said.

The key for investors is to find companies with limited feedstock risk, multiple end markets, and a diverse approach to technology. "If you have all your eggs in one basket, it's harder to recover when a major partner pulls out," Soare said.

Yet the reliance on major balance sheet partners to whom these investments are pocket change and who can drop these relationships on a dime exists for all of the recent IPO companies.

Solazyme has diverse partners like Dow and Unilever, but Dow has proven fickle in this market, as in the NatureWorks example. Total has a 17% stake in Amyris.

"If Total would pullout, Amyris still has supply agreements and it wouldn't collapse, but it would be significant," Soare said. Gevo is also supported by Total.

The importance of a Total or Chevron to this emerging market presents the biggest risk of all: Ultimately they perform triage on their bio-experiments.

Royal Dutch Shell ( RDS.A) had a dozen investments in the biofuel space and has starting trimming it to focus on algae investments. Total or Chevron won't likely leave itself dependent on any one technology, but they too might "drop a few companies" cautioned Soare.

The bottom line of the ADM decision is not good for the bioproduct IPO dreamers: "Looking at a higher level, one big thing with these companies going public has been strong partners for feedstock and facilities. This will scare away some investors counting on strong relationships from potential IPOs, counting on the relationships to stick. ADM will cause people to rethink the market," Soare said.

-- Written by Eric Rosenbaum from New York.


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