By Jennifer Kho

Biotech company Diversa announced Monday it will acquire Celunol in a deal worth roughly $182.45 million.

The companies are both working on cellulosic ethanol, or ethanol from the non-food plants or parts of plants, such as wood chips, switchgrass, and cornstalks, and claim the deal will create the first “end-to-end” cellulosic-ethanol company in the United States.

Diversa, a publicly traded company in San Diego, California, is working on enzymes that can break down cellulose into sugars, so it can be made into ethanol. Celunol, a private company in Cambridge, Massachusetts, has processing technology, as well as plans to build a 55-million-gallon ethanol plant and investors like Khosla Ventures and Braemar Energy Ventures.

The Diversa and Celunol deal could accelerate the commercialization of cellulosic ethanol. Cellulosic ethanol is a technology that could potentially boost ethanol into the mainstream (see The Fuel of the Future?). That’s because the ethanol industry is limited by the supply of farm crops, as the same land is needed to grow crops for food as for fuel.

According to the U.S. Energy Information Administration, 20 percent of the land in Europe and the United States would be needed to grow crops to replace 5 percent of transportation fuel with biofuel. Rising corn and soybean prices, as well as an Earth Policy Institute study finding ethanol will require twice the corn as previously expected in 2008 (see Ethanol=Soaring Corn Prices?), has raised pressure for the industry to solve the “food vs. fuel” problem

“The growth of the biofuels industry, and cellulosic ethanol in particular, is one of the most important developments in today’s energy sector,” said Carlos Riva, CEO of Celunol, who also will head the combined company. “The global market demand for alternative fuels such as cellulosic ethanol is potentially massive. We believe the combined strengths of both companies will enable us to accelerate commercialization of cellulosic ethanol.”

Diversa’s former CEO, Jay Short, resigned in 2005. He was replaced on an interim basis by Edward Shonsey, the former executive vice president of internal development, as the board sought a CEO more experienced in commercialization.

Buying A Competitive Advantage

Rick Kment, an ethanol and biofuels analyst at research firm DTN, said the deal is good for Diversa and Celunol.

“These are two of the leaders in this area, with two major components really needed in the development of cellulosic ethanol,” he said. “To develop them under one roof, or under one entity, should be a benefit in developing a competitive advantage in the upcoming cellulosic ethanol industry.”

The deal also is likely to be the first of several mergers and acquisitions, he said.

“It’s interesting in that this might be the start of consolidation in the ethanol industry,” he said. “It’s one of the things that is helping to lower the pressure as more of the players try to reposition their hands to develop where they want to be in the next two to 10 years. I think you’ll see more of this.”

The Deal

According to the announcement, Diversa will issue 15 million shares to buy Celunol’s outstanding equity. In recent trading, Diversa shares were up $0.52 to $10.83, bringing the value of 15 million shares to $162.45 million.

In addition, Diversa will invest $20 million in debt financing to fund Celunol before the deal closes.

Stockholders will retain ownership of about 76 percent of the combined company, and Celunol stock- and option-holders will own the remaining 24 percent.

The deal was unanimously approved by both companies’ boards. Diversa expects the merger to be finalized at the end of the second quarter.

Players’ Details

Celunol operates what it claims is the first cellulosic ethanol pilot plant in the United States in Jennings, Louisinana, and has also commissioned SunOpta to build a demonstration-scale cellulosic plant to make ethanol from sugarcane bagasse, among other things (see SunOpta to Build in U.S.)

The 1.4-million gallon plant, in August expected to be completed in “early spring” with a capacity of 1.5 million to 1.7 million gallons, is now expected to be completed by the end of this year, according to the announcement.

Now, Diversa and Celunol will work together on the demonstration facility—lowering production costs by using Diversa’s enzymes. In 2008, the by-then-merged companies expect to complete development of, and raise money for, commercial-scale facilities, according to an external spokesperson for Diversa.

Diversa is an enzyme producer that has genetically engineered so-called “extremophiles,” or bacteria that thrive in heat or acidity and in the guts of termites (see Ethanol: Cellulose Break Down).

The company is jointly developing enzymes with DuPont to digest corn biomass, and is collaborating with global agri-giant Syngenta to develop transgenic corn that produces high levels of an enzyme needed to break down the corn to make ethanol.