29th Jun 2007 07:03
D1 Oils Plc29 June 2007 29 June 2007 D1 Oils and BP to establish global Joint Venture to plant jatropha D1 Oils plc, the UK-based global producer of biodiesel, plans to establish aglobal Joint Venture with BP to create a world-leading business in Jatrophacurcas: D1-BP Fuel Crops Limited. Jatropha is an oilseed tree that grows in tropical and sub-tropical regions andproduces high yields of inedible vegetable oil that can be used to producehigh-quality biodiesel. Jatropha can grow on a wide range of land types,including non-arable, marginal and waste land. Jatropha does not compete withfood crops for good agricultural land or result in the destruction ofrainforest. Highlights • Establishment of a 50:50 Joint Venture to undertake global planting of jatropha • Target to plant one million hectares over four years • Initial contribution of parties: - D1 planting to date and planting business - BP working capital of £31.75 million through equity in the Joint Venture • Total Joint Venture funding requirement of approximately £80 million over five years • Plant science remains 100 per cent. owned by D1 • D1 to grant BP an option to subscribe for new shares representing 16 per cent. of its enlarged share capital at an average price of 251 pence •Major global business to plant jatropha as sustainable biodiesel feedstock • Endorsement by BP of D1's sustainable feedstock strategy • Potential to produce low-cost, volume supplies of inedible oil for biodiesel • Use of marginal and waste land and land unsuitable for arable crops • No competition with high biodiversity value rainforest • Significant job creation and value to local communities Under the terms of the Joint Venture Agreement signed today (subject to D1shareholder approval), D1 and BP will work together exclusively on thedevelopment of jatropha as a sustainable energy crop, including the planting oftrees, harvesting jatropha grain, oil extraction and transport and logistics.Production of jatropha oil for refining into biodiesel is expected to begin in2008. D1 Oils Plant Science Limited, D1's plant science business, will act as theexclusive supplier of selected, high yielding jatropha seeds and seedlings tothe Joint Venture. The strategy for the Joint Venture sees it planting Eliteseed in greater quantities than D1's stand alone plan. With the conclusion of this transaction D1 will comprise, in its upstreambusiness, its wholly owned plant science operations together with the IP inplant science, in addition to 50 per cent. of a global planting joint venturewith BP. In its downstream operations, the business will include, as it doesnow, its wholly owned interests in refining and trading. Commenting on the announcement, Lord Oxburgh of Liverpool, Chairman of D1 Oilsplc said: "Biodiesel is a young industry, but is rapidly becoming an established part ofthe global renewable energy landscape. It is crucial that we develop supplies ofalternative, inedible vegetable oils like jatropha that are not subject to thesame demand pressures as food oils and that are grown on non-essential land.This partnership with BP strengthens D1's strategy of delivering commercialvolumes of jatropha oil at competitive prices, whilst truly supporting thecommunities in which we operate." Elliott Mannis, Chief Executive Officer of D1 Oils plc, said: "This is a transforming event for D1. BP's decision to join us in this newventure is a significant endorsement of our strategy to develop jatropha for theproduction of sustainable biodiesel. It shows we have come a long way. BP'sproven logistical, managerial and financial support will enable a significantenhancement and acceleration of the scope and pace of jatropha planting." Philip New, Head of BP Biofuels, said: "As jatropha can be grown on land of lesser agricultural value with lowerirrigation requirements than many plants, it is an excellent biodieselfeedstock. D1 Oils' progress in identifying the most productive varieties ofjatropha means that the joint venture will have access to seeds which cansubstantially increase jatropha oil production per hectare." Contacts: D1 OilsGraham Prince, Head of Corporate Communications +44 (0) 7973 323840 Brunswick +44 (0) 20 7404 5959Kevin Byram / Mark Antelme Interviews with Elliott Mannis and Philip New are now available in video / audioand text at www.d1plc.com and at www.cantos.com There will also be a conference call for analysts, hosted by Elliott Mannis,today at 09.30am. Accompanying slides will be available on www.d1plc.com Dial-in details: Participant dial-in: +44 (0) 1452 541 076Pin: 5897646 A replay facility, including slides, will be available on www.d1plc.com An audio-only replay facility will also be available on: Dial-in: +44 (0) 1452 550 000Pin: 5897646 # D1 is being advised by Dresdner Kleinwort Limited Dresdner Kleinwort Limited, which is authorised and regulated by the FinancialServices Authority, is acting for D1 Oils plc and for no-one else in connectionwith the contents of this document and will not be responsible to anyone otherthan D1 Oils plc for providing the protections afforded to customers of DresdnerKleinwort Limited, or for affording advice in relation to the contents of thisdocument or any matters referred to herein. Introduction The Board of D1 Oils plc ("D1" or the "Group") announces that it has, throughits subsidiary D1 Oils Trading Limited ("D1 Oils Trading"), signed a conditionalagreement in relation to a proposed 50/50 joint venture between BP InternationalLimited ("BP" or "BP International") and D1 Oils Trading (the "Joint Venture")which includes the granting of the Option as described below. The business of the Joint Venture will be the worldwide vehicle for planting ofjatropha curcas and the sale of jatropha oil. D1 will contribute its existingplanting footprint. The plant science, refining and trading operations of theGroup will not form part of the Joint Venture. The Joint Venture will be set up by way of a company incorporated in England,D1-BP Fuel Crops Limited ("D1-BP Fuel Crops"), in which D1 Oils Trading and BPInternational will own equal shares. D1 Oils Trading and BP International willeach appoint equal numbers of directors to the board of D1-BP Fuel Crops. D1-BPFuel Crops will have a dedicated Managing Director and its own financialcontrols. The Joint Venture represents a key strategic step for D1. Approximately 1.9 percent. by book value of the Group's net assets will be transferred into D1-BPFuel Crops to implement the Joint Venture, by way of a UK asset transferagreement signed today and certain asset sale agreements to be entered into, inlocal jurisdictions, after Shareholder approval (see below) has been obtained. In consideration for the transfer by D1 of its existing planting and overseasorganisation into the Joint Venture and the granting to BP of the Option, BP hasundertaken to fund the first £31.75 million of the Joint Venture's workingcapital requirements through an equity subscription. It is the intention that,thereafter, both parties fund expenditure within the Joint Venture on a pro ratabasis. It is anticipated that the total funding requirement of the Joint Ventureover the next five years will amount to approximately £80 million. BP will also contribute certain jatropha supply-chain know-how obtained to datethrough its participation in a jatropha/biodiesel demonstration project with TheEnergy Resources Institute (TERI) in India. In addition, BP will contributeharvested grain and oil associated with the TERI project. The D1 Board believes the valuation for its existing planting and overseasorganisation implied by the terms of the transaction compares favourably withits own appraisal. It is the intention of D1 and BP that the Joint Venture will plant one millionhectares of jatropha in its first four years. The parties have agreed inprinciple that each party will have the right to offtake 50 per cent. of theexported volume of crude jatropha oil on market terms. D1's existing plant science and seed multiplication activities will betransferred into a newly incorporated company, D1 Oils Plant Science Limited(DOPSL). DOPSL will be wholly-owned by D1. The Joint Venture will enter into anexclusive Seed Purchase and Service Agreement with DOPSL. As part of the JointVenture, mutual trademark licences will be granted by D1 and BP plc for the useof their respective marks and logos in relation to the activities of the JointVenture. Coupled with the Joint Venture, the Company proposes to grant, subject toShareholders' approval, an Option to BP International to acquire up to11,725,467 new Ordinary Shares in four tranches at prices from 210 pence to 300pence (the "Option"). The Option will be exercisable by BP at any time duringthe option period (being the period commencing on implementation of the JointVenture and ending three years after such time) in whole or in part. Assuming BPexercises the Option in full and no further shares in the Group were issued, BPwould hold 16 per cent. of the enlarged issued share capital of the Group. Uponissue, the Option Shares will rank parri passu with all other Ordinary Shares ofthe Group though be subject to certain restrictions under the Option Agreementand it is intended that the Option Shares will be admitted to trading on AIM.The weighted average strike price of the Option is 251.25p, a 54.1 per cent.premium to the average D1 closing share price between 30 November 2006, the dateof announcement of D1's most recent placing and 14 June 2007, the day beforeD1's announcement regarding its share price movement. Shareholder approval is being sought for the entry into and implementation ofthe Joint Venture and the granting of the Option; accordingly completion of theJoint Venture including the grant of the Option is conditional upon the approvalof Shareholders at the EGM. The Joint Venture and the Option will not beimplemented unless such approval is obtained. The D1 Board is confident thatthis represents a transaction in the best interests of Shareholders as a whole.A circular will be sent to Shareholders in due course containing furtherinformation about the Joint Venture and the Option and convening the EGM. The purpose of this announcement is to provide you with further information onthe proposed Joint Venture and the Option. Development of the D1 business to date D1's organisation and strategy is centred around its three business activitiesof agronomy, refining and trading. In agronomy, D1 is a leader in the scientific and commercial development ofjatropha, and has achieved significant planting and offtake rights worldwide.Together with its partners, D1 has a substantial jatropha planting footprintacross its three operational regions of India, Southern Africa and South EastAsia. As of 23 June 2007, D1, together with its partners, had planted orobtained rights to offtake from a total of 172,241 hectares. D1 has gathered a sufficiently wide range of jatropha material to support thecommercial breeding and product placement trials for the crop. D1 has collectedmore than 200 accessions of jatropha from more than twenty countries acrossthree continents. Using field and laboratory data from this material, D1 hasestablished a breeding programme and global trials network to identify whichindividual jatropha cultivars are best adapted to different cultivation zones.The first commercial outcome of the plant science programme is the 'E1' eliteseed material, selected for higher yield and good biodiesel profile. D1 expectsthis seed will deliver oil yields of 2.7 tonnes per hectare under properlymanaged conditions when the trees attain maturity. D1 expects to plant out50,000 hectares of its E1 elite seed in 2008. In refining, D1 presently has 32,000 tonnes of capacity in beneficial operationat its Teesside site, and has acquired a second refining and distribution siteat Bromborough on Merseyside, where the D1 Board expects to add a further100,000 tonnes of capacity by the end of 2007. Work on the first phase ofoperations to convert the existing facilities for production of biodiesel atBromborough is in line with expectations, and the Environment Agency hasconfirmed that biodiesel processing can be undertaken at the site within theexisting permit. In addition, a fifth D1 20 refinery unit is being commissionedat the Teesside site, and this will increase the Teesside production capacity to42,000 tonnes. In trading, D1 has begun the development of a global supply chain to support itsagronomy and refining operations. Having received the first volume shipments ofsoya oil in the middle of 2006, the Company signed its first offtake deal withPetroplus for supply of soya biodiesel in October last year. A placing in December 2006 raised £49.2 million before expenses to fund, subjectto a number of key assumptions set out in a circular to Shareholders dated 30November 2006, D1's business plan without further recourse to shareholders. Themain features of that business plan which related to the agronomy activitieswere: • Planting at a rate of 150,000 hectares per year • Development of the planting business model • targeting a higher proportion of managed plantations and quality planting joint ventures; and • developing the logistics and supply chain • Continued investment in jatropha plant science and plant breeding to enable large-scale deployment of elite material, for better yields and oil quality The directors believe that D1 has made good progress against each of theseobjectives and, on a standalone basis, the directors would expect to meet them. However, with the proposed Joint Venture, the directors believe that they canaccelerate progress in each of these areas and thereby add value toshareholders. This is explained further below. Global context Transport energy policies across the globe are now increasingly driven by thechallenges of climate change, fuel security and sustainability. The D1 Boardbelieves biofuels, and in particular biodiesel, offer a means to securecost-effective supplies of sustainable transport fuel in the medium-term.Biofuels are increasingly supported by national and regional policy initiatives.By way of example, the Renewable Transport Fuel Obligation (RTFO) in the UK is arequirement on transport fuel suppliers to ensure that, by 2010, 5 per cent. ofall road vehicle fuel is supplied from sustainable renewable sources. The RTFOis being phased in progressively, with 2.5 per cent, 3.75 per cent and 5.0 percent. of all road vehicle fuel supplies in 2008, 2009 and 2010, respectively, tobe supplied from renewable sources. The UK RTFO is supported by an ongoing 20pence per litre fuel duty derogation and from 15 April 2008, the introduction ofa 15 pence per litre penalty for non-compliance. Meeting UK and European demand without recourse to imported feedstocks isincreasingly challenging. Despite the recent increase in diesel prices, highfood-grade feedstock costs have, for a number of months, significantly impactedindustry margins, and the D1 Board believes it prudent to plan for ediblevegetable oil prices remaining relatively high for the foreseeable future. The table below shows the movements in the pricing of key edible feedstockvegetable oils: Feedstock vegetable oil at current prices* (US$ As at As at As atper tonne) June December June 2006 20061 2007 Rapeseed (RBD ex-tank UK) 919 944 960Soya (RBD ex-tank Rotterdam) 705 795 898Palm olein (FOB Malaysia) 417 608 770 Note1. Date of recent cash placing Source: The Public Ledger D1's strategy is to develop supplies of alternative, inedible oils that are notsubject to the same demand pressures as food oils, and which can be landed inEurope at target prices that are very competitive even against the cheaperfood-grade alternatives. The feedstock crops must also add value to thesocieties where they are grown, meaning that there must be socio-economicbenefits locally, and the crops should displace neither food crops nor precioushabitat such as rainforests. Faced with these challenges, D1 has selectedJatropha curcas for large scale commercial development, and today's announcementreflects BP's endorsement of this strategy. Information on BP BP operates globally with a workforce of nearly 100,000 employees, and 2006revenues of US$ 270.6 billion, and has business activities and customers in morethan 100 countries across six continents. BP is organised into three differentbusiness segments: • Exploration and production ("E&P") • Gas, power and renewables • Refining and marketing E&P BP's upstream activities include oil and natural gas exploration and production,together with the management of crude oil and natural gas pipelines, processingand export terminals. BP has active exploration activities in 26 countries. BP Shipping operates an international fleet of crude oil tankers, producttankers and LNG (liquefied natural gas) carriers, transporting energy productsworldwide. Gas, power and renewables BP's gas business manages its interests in the transport, regasification andmarketing of liquefied natural gas and the operation of processing plants. Thebusiness consists of three business units structured regionally; America, Europeand Asia. They focus on developing market access opportunities, negotiating andsecuring contracts for BP's equity and third party LNG supplies, and BP'sparticipation in LNG re-gasification terminals. Refining and marketing BP's downstream operations refine, transport, sell and trade crude oil andpetroleum products in over 100 countries. They include refineries, petrolstations, lubricants, business marketing and chemicals (aromatics and acetyls)businesses. The BP group owns, wholly or in part, 19 refineries. BP retails fuel, lubricants and, in many cases, everyday convenience items,through more than 25,000 petrol stations worldwide. In the commercial vehicle and general industrial markets, BP supplies lubricantsand lubricant-related services to the transportation industry and to automotivemanufacturers. BP accounts for approximately 15 per cent. of the European transportation dieselmarket, and is also one of the largest blenders of biodiesel in Europe. In thecurrent year, BP expects to deliver approximately 700,000 tonnes of blendedFAME. This business segment also incorporates BP Biofuels, the business unitwhich will be responsible within BP for the proposed Joint Venture. BP'spublicly announced initiatives relating to biofuels include: • A US$9.4 million, 10 year jatropha/biodiesel demonstration project with TERI in India. The project is expected to plant 8,000 hectares of jatropha, and study technical, commercial and operational issues right down the supply chain from cultivation to processing to end use. • The establishment of the Energy Biotechnology Institute (EBI) at University of California Berkeley, the University of Illinois and the Lawrence Berkeley National Laboratory. This is a US$500 million programme to study how bioscience can be applied to the production of new and cleaner energy, principally fuels for road transport. • A partnership with DuPont, announced in early June 2006, to develop, produce and market the next generation of biofuels. The first initiative announced on 26 June 2007, is a UK bioethanol facility, in partnership with British Sugar, a subsidiary of Associated British Foods plc. The initiative includes investment plans totalling around US$400 million, for the construction of a world-scale bioethanol plant alongside a high technology demonstration plant to advance development work on the next generation of biofuels. The bioethanol plant, due to be commissioned in late 2009, will be built on BP's existing chemicals site at Saltend, Hull and will have an annual production capacity of some 420 million litres from non-food grade wheat feedstock. • A 110,000 m3 per annum hydrogenation facility, using tallow as the feedstock, at Bulwer Island, Australia. Reasons for the Joint Venture and Strategy BP plc has a market capitalisation of approximately £114.6 billion. Thecombination of both financial and industrial strength make it a partner withconsiderable credibility internationally to assist D1 in the next stages of itscorporate development. It is proposed that the Joint Venture will be establishedbetween D1 and BP International, a subsidiary of BP plc. BP International, whichis based in the UK, is engaged internationally in oil, petrochemicals andrelated financial activities. BP International also holds investments insubsidiary and associated undertakings engaged in similar activities. For theyear ended 31 December 2005, BP International reported turnover of £31.4 billionand profits after taxation of £911 million. As at 31 December 2005, BPInternational had net assets of £3.8 billion. The combination of BP's strong brand and reputation, its major presence indownstream transportation fuel markets, its strong understanding of associatedtechnical and regulatory issues and demand drivers, its access to governments,NGOs and other large organisations and its trading and logistics expertise, makeit an attractive partner for D1. It will also contribute to the development of aworld leading player in jatropha. The Joint Venture business plan is a significant augmentation to the planoutlined to our shareholders at the time of D1's most recent placing and theBoard believes it will deliver more value to D1 shareholders than the standalonestrategy. More specifically the D1 Board believes the proposed Joint Venturewill have a beneficial impact on: • Plantation management and Crude Jatropha Oil ("CJO") production (the business of the Joint Venture) • Plant science and seedling production • The wider D1 group Plantation management and CJO production As outlined above, D1 has established a leading position globally in thecommercialisation of jatropha as a biofuels crop. Jatropha is an oilseed treethat grows in tropical and sub-tropical regions and produces high yields ofinedible vegetable oil that can be used to produce high-quality biodiesel.Jatropha can grow on a wide range of land types, including non-arable, marginaland waste land. It will not compete with food crops for good agricultural landor result in the destruction of rainforest. D1 is on track to deliver on theobjectives for its Agronomy business as identified at the time of D1's mostrecent placing in December 2006. The Joint Venture will adopt a business planwhich the D1 Board believes significantly exceeds D1's standalone plan in termsof scale and quality and that the involvement of BP with its competencies andresources will increase the likelihood of a successful implementation of theplan. The key features of the Joint Venture business plan are: • An accelerated planting programme. The Joint Venture business plan is to target 1.0 million hectares of new commercial jatropha cultivation over the next four years compared to approximately 600,000 hectares on a standalone basis. In the first year of the Joint Venture the pace of planting is likely to remain at the current 150,000 hectares per annum target. However, the pace of planting is expected to increase thereafter up to a targeted rate of at least 350,000 hectares per annum by the fourth year. • A higher quality planting programme. D1 has to date focused on contract farming and seed purchase agreements. These planting methods are less capital intensive and better reflect D1's financial resources. The arrangements have facilitated the roll-out of D1's vertically integrated jatropha based strategy but are limited by: the use of lower yielding wild seed; wide variations in land quality and agricultural techniques and the substantial number of partners spread across a wide geography. The Joint Venture's planting is intended to be much more strongly weighted towards managed plantations where the Joint Venture owns and/or controls the land and production, and towards local partners of significant scale and depth. This is a more capital intensive approach than has been hitherto used by D1 to expand the business, but will result in more reliable oil flow to the Joint Venture than some of D1's existing contract farming and seed supply relationships. Forming the Joint Venture will facilitate this strategy, partly because BP will help with the extra funding implied by the extra capital intensity, and partly because BP's reputation and standing are likely to help attract high quality partners. • More rapid deployment of higher yielding jatropha varieties. All planting to date has been undertaken using uncultivated "wild seed" which D1 believes will yield 1.7 tonnes per hectare from mature, well managed plantations. The Joint Venture will focus on the deployment of elite E1 seeds, targeting yields of 2.7 tonnes per hectare as rapidly as is practicable and at a faster rate than under D1's standalone business plan. In due course subsequent generations of proprietary seed with increased yields and / or improved characteristics will be utilised. DOPSL, D1's new plant breeding and seedling production company, remains outside the Joint Venture and will be an exclusive provider of elite planting material and will produce more elite seedlings than under the standalone plan. This is possible because the planting programme will be both larger, and will comprise a higher proportion of land where the commercial relationship is strong enough to merit the deployment of elite seed. Furthermore, as discussed below, under the terms of the proposed arrangement, the increase of DOPSL's production capability will be fully paid for by the Joint Venture, even though DOPSL itself remains a wholly-owned subsidiary of D1. • Development of logistics strategy and a global supply chain. As well as offering the opportunity for greater levels of planting and at higher yields, the formation of the Joint Venture will assist with establishing a full, vertically integrated supply chain taking harvested seeds through crushing and pre-processing, and then delivering CJO both to domestic and export customers. BP brings very considerable expertise in establishing and managing operations and supply chains on a global basis and the D1 Board believes that the Joint Venture will draw significant benefit from BP's experience in this field. • Use of BP network and brand. BP has a strong presence and reputation in almost all of the countries where the Joint Venture will be operating. The Joint Venture will capitalise on this in its dealings with government and regulatory agencies, NGOs and current or potential partners. In addition to lending its name to the Joint Venture, BP plc has provided a royalty-free licence agreement allowing the Joint Venture to use the BP "helios" trademark on its communications materials. • Enhanced funding for D1 and leverage for its shareholders. The capital required by the Joint Venture is to increase the scope and pace of planting activities, focus on the deployment of elite seed, finance a significant increase in DOPSL's production capacity, and develop an optimal logistics strategy. Of this BP will be responsible for funding the first £31.75m of working capital. These monies are expected to be drawn down over the next two years, thus providing a cash flow benefit to D1 relative to its standalone plan. Beyond this, D1 and BP will be jointly responsible for funding the Joint Venture on a basis pro rata to their shareholdings. The Joint Venture is also able to raise further funds in the debt capital markets. Currently, the D1 Board's funding plan has not contemplated debt funding of agronomy beyond inventory finance. Plant science and seedling production D1's plant science and seedling production business will be transferred intoDOPSL, which will remain a wholly-owned subsidiary of D1. The formation of DOPSLestablishes D1's existing plant science and seedling production business as adiscrete stand-alone entity with its own dedicated team. This will enable DOPSLto (i) maintain its focus on research and development, and (ii) provide theframework by which it can increasingly contribute to the D1 group. DOPSL'sproduction costs will be fully funded by the Joint Venture. The Joint Venturewill benefit D1's plant science programme for the following reasons: • Key intellectual property (IP) in plant science retained. Keeping plant science within D1 will retain 100 per cent. ownership of the significant IP which it has developed to date and which is expected to be generated in the future. • Improved focus and greater transparency. DOPSL will be managed separately from the plantation business, reflecting the different ownership structures of the businesses. The D1 Board expects that the separation of the management responsibilities for two businesses with quite distinct operational characteristics will result in sharper focus and greater transparency of value. • De-risked, fully funded growth path. The Joint Venture will pay for all of DOPSL's costs of production, including capacity expansion, when those costs arise as DOPSL increases production to meet the Joint Venture's growing planting requirement. The reimbursement of these costs, which will incorporate a 13 per cent. mark-up, should enable DOPSL to avoid excess unrealisable inventory, a key business risk typically associated with young seed businesses investing in multi-year seed multiplication programmes. The Joint Venture will also fund a range of technical support services provided by DOPSL. • Potential for a long-term, stable annuity income. The Joint Venture will in addition pay DOPSL an annual performance fee for high yield performance by the plants it supplies to the Joint Venture. This fee is US$50 for every tonne of oil yielded in excess of a benchmark yield equivalent to 1.75 tonne per hectare for mature trees, and will be reviewed every three years. By way of illustration, if this arrangement were to apply to 200,000 hectares after four years, and DOPSL's plants were to achieve yields of one tonne per hectare per annum over the benchmark, then this should produce US$10 million per annum over the mature life of those trees. Furthermore, DOPSL will provide agronomy technical support to the Joint Venture, on a cost-plus basis. This is expected to produce several hundred thousands of dollars of additional income per annum. • Flexible technology strategy. DOPSL's R&D programme will be wholly funded by D1, which retains all IP. This will initially be focussed on jatropha plant science for the benefit of D1-BP Fuel Crops, in order to earn the annual performance payment described above. In addition, DOPSL is free to investigate and to develop other technologies. Under the terms of the arrangements, the Joint Venture has a right of first refusal to certain new crops/technologies. BP is equally restricted from licensing jatropha-related IP to competitors of the Joint Venture, and cannot itself compete with the Joint Venture. Accordingly, the D1 Board anticipates there are likely to be opportunities for DOPSL to develop new technologies in addition to jatropha and to engage with BP's technology partners, for example through the Energy Biosciences Institute ("EBI"). In this environment, D1 is confident that DOPSL will identify opportunities to develop new business streams either with its own resources or in conjunction with BP. Benefits to the wider D1 group The Board believes that the formation of the Joint Venture will also havebroader benefits to D1, in addition to those relating to the Agronomybusinesses. • Exercise of the rights within the terms of the Option agreement would give a broader alignment of interests between BP and D1 Oils plc. The weighted average strike price of the Option is 251.25p, a 54.1 per cent. premium to the average D1 closing share price between 30 November 2006, the date of announcement of D1's most recent placing and 14 June 2007, the day before D1's announcement regarding its share price movement. The number of option shares (combined with other shares which may be acquired by BP in the market subject to compliance with a standstill, orderly marketing and other applicable terms of the Option Agreement) will equate, subject to the terms of the Option Agreement, to a maximum of 16 per cent. of the issued share capital of D1 Oils plc post-exercise from time to time and full exercise of the Option could result in the subscription of approximately a further £29.5 million to D1's cash resources. The D1 Board believes the Option offers the prospect of significant breadth and depth to the alignment of interests, and welcomes the fact that BP, following exercise of the Option, would have a significant economic interest in the future success of D1. As part of the Option, BP will be granted non-voting 'observer' rights on the board of D1 Oils plc to the extent it has exercised three tranches (12 per cent.) of the option shares, subject to customary 'conflict of interest' provisions. • A powerful ally in making the case for jatropha. D1's business model is based on cultivating jatropha in a range of countries, and conversion of the resulting CJO into biodiesel, both in those countries and via export to the UK and the rest of Europe. In the context of the broader debate on biofuels, this requires political and regulatory support, public enthusiasm for the socio-economic and sustainability merits of the model, plus effective integration with the technical requirements of downstream markets. The D1 Board believes that all this can be achieved without the Joint Venture, but with the Joint Venture in place, and BP aligned to achieve the same objectives, BP should be a powerful ally in, for example, government policy consultation processes, industry technical standards committees, and dealings with technical regulators. • External validation of strategy. BP has been evaluating the potential of jatropha as a non-edible fuel crop since February 2006 through its relationship with TERI. D1 and BP have been in discussions regarding some form of strategic cooperation since July 2006. During this time both parties have conducted considerable mutual due diligence including field visits and sustainability and contract reviews. • Enhanced prospects for D1's refining business. While D1's refining activities are not included in the scope of the proposed Joint Venture, D1's refining business should benefit from any role BP plays in helping make the general case for biodiesel from jatropha oil, and also from improved access to BP as a potential customer of D1's refineries. It should be noted that D1's planned rollout of UK refining capacity was always anticipated to be comfortably below the projected volumes of CJO imports from the Agronomy business, and this is still true with the formation of the proposed Joint Venture. Overseas, the prospect of more CJO being produced in the various countries is likely to create more local refining opportunities for D1 than would have been the case without the Joint Venture. Finally, D1 is developing process technology expertise relating to both the expelling and pre-processing of Jatropha (necessary prior to its use as a transesterification feedstock), which is within the scope of the Joint Venture. Therefore the Joint Venture may become a customer for this technology. Other investment considerations The D1 Board has reviewed the strategic and financial merits of alternativestrategies. Although the D1 Board strongly believes that the proposedtransaction is in the best interest of Shareholders, it would draw attention tothe following: • Voting control. The proposed transaction is expected to result in a loss of overall voting control over D1's planting activities. However, D1 retains significant negative control. A large number of matters require unanimity of Directors' or shareholders' votes, and this remains true in the event of dilution of either party below 50 per cent. • Sharing of reward and risks. D1 will now share the future benefits and risks associated with the rollout of its planting programme, with BP through the 50/50 Joint Venture and its preferential access to D1's plant science. • BP's future strategy. BP's commitment to the development of a world leading player in jatropha may change over time and there is consequently a risk that the one million hectares planting target will not be met. The joint venture agreement provides that either party may enact a termination if the business is not attaining its growth targets. • DOPSL's commercial flexibility. DOPSL's plant science business is exclusive to D1-BP Fuel Crops. In light of this exclusive arrangement, DOPSL is expected to have enhanced growth potential compared to D1's existing strategy. This exclusivity restriction however only relates to jatropha and any other crops adopted by D1-BP Fuel Crops. • Business transition. There is potential for disruption during the transfer of activities into the Joint Venture. Disruption may affect, inter alia, pre-existing joint venture relationships, the creation of a new management team and the integration of different cultures. The initial organisation of the Joint Venture, however, will be essentially identical to D1's current overseas organisation, with the same staff working with the same partners. • BP's strategic influence. Whilst the Joint Venture agreement does not contain change of control provisions, BP's Option and its involvement in the exclusive agronomy Joint Venture may restrict the opportunities for a future value realisation event involving D1. However, any potential strategic investors in D1 may value BP as a future partner for many of the same reasons as expressed in this document. Summary The Joint Venture with BP is a unique opportunity for D1 to partner with a majorglobal oil player. While under the terms of the Joint Venture agreement, D1 willbe sharing control of its planting activities, the Joint Venture will enable D1shareholders to benefit from the acceleration of a larger and higher qualityplanting programme. BP's involvement and support financially, managerially andlogistically should significantly increase the likelihood of the successfulimplementation of the plan. Although DOPSL will enter into an exclusive Seed Purchase and Service Agreementwith the Joint Venture, under the terms of this agreement, the Joint Venture hasagreed to fund DOPSL's production costs, significantly reducing the risk of thisbusiness. DOPSL will also have the ability to take advantage of opportunitiesfor business development away from the Joint Venture. The D1 Board believes the business plan for the Joint Venture should result inenhanced financial returns with a higher degree of confidence in cash flowsversus the standalone position. Although D1 will now have a 50 per cent.participation in the planting programme when compared with the current position,the very significant acceleration of the rollout (from c.600,000 hectares to1,000,000 hectares), the increase in its quality and the de-risking of thecommercial proposition offer Shareholders significantly enhanced prospects. Thedirectors believe that the terms of the proposed transaction and enhancedprospects more than compensate for the reduction in strategic flexibilityimplied in the decision to joint venture a significant part of its business witha single partner and any potential dilution from the exercise of the Option. Management and staffing of the Joint Venture D1-BP Fuel Crops' board of directors from time to time will comprise sixdirectors, three (including the Managing Director) appointed by D1 and three(including the Finance Director) appointed by BP. The chair of D1-BP Fuel Crops' board (who will not have a casting vote) willalternate annually, with the first chairman being one of the non-executivedirectors appointed by D1. The D1-BP Fuel Crops' directors appointed by a party will reduce from three totwo (one executive director and one non-executive director) for such periodduring which that party owns or is beneficially interested in 30 per cent. orless of the issued shares of D1-BP Fuel Crops. The appointment of the Managing Director and Finance Director of D1-BP FuelCrops will be announced in due course. The following Non-Executive Directorswill be appointed to the Board of D1-BP Fuel Crops: Elliott Mannis Non- executive Director (appointed by D1) Barclay Forrest Non-executive Director (appointed by D1) Philip New Non-executive Director (appointed by BP) Paul Willems Non-executive Director (appointed by BP) The Non-Executive Directors of D1-BP Fuel Crops will not receive anyremuneration or benefits in relation to their appointments. The quorum of each D1-BP Fuel Crops board meeting is one director appointed byD1 and one director appointed by BP. Decisions will be taken on the basis of asimple majority of votes, subject to customary matters reserved to asuper-majority of the D1-BP Fuel Crops Board and/or the shareholders of D1-BPFuel Crops. In the event of a deadlock, resolution procedures will apply. The Managing Director will have delegated powers specified by the D1-BP FuelCrops board, consistent with the requirements of the shareholders of D1-BP FuelCrops and the objectives of the Business. In due course, regional and country staffing of D1-BP Fuel Crops will beachieved by the transfer of existing D1 local management teams into D1-BP FuelCrops. BP's senior in-country management will also be made available free of charge todevelop the Business of D1-BP Fuel Crops, at a level which BP views asreasonable. Financial effect of the Joint Venture on D1 The development of a jointly agreed business plan and financial model has beenan integral part of the discussions between D1 and BP. The D1 Board has analysedthis financial model and its impact on the projected financial position of theD1 group overall. The D1 Board has formed the following views: • Based on the present value of future cash flows, implementation of the joint venture will be value accretive on a per share basis, compared with the implementation of a standalone strategy (irrespective of whether or not the Option is exercised). • Projections of the net cash position suggest the working capital position in each quarter of the four year plan will be enhanced, as a result of, amongst other things, the receipt of the planting credit, again irrespective of whether the Option is exercised. Accordingly, the D1 Board believes that the Group should be able to fund thedelivery of the strategy described above without further recourse to theproceeds of the Option or Shareholders subject to the following key assumptions: • Key commodity price and exchange rates not moving materially outside reasonable historic norms for extended periods of time where such movements would decrease the cash flows of the Company; • The Company deploying its planned refining capacity within a reasonable period of that currently targeted; • The progressive introduction of the RTFO from April 2008 provides a pricing environment for biodiesel in the UK at least in-line with the D1 Board's prudent economic assumptions; • Bank funding for the D1 Group is available on reasonable market terms and in the amounts assumed by the Board; and • No material adverse changes to the regulatory and fiscal environments for biofuels that are relevant to the Company's strategy. In addition to the key issues as set out above, your attention is drawn to therisk factors set out in the Company's admission document dated 21 October 2004and subsequent placing documents dated 31 May 2005 and 30 November 2006. In developing the jointly-agreed business plan and financial model for the JointVenture, the D1 Board and BP have mutually reviewed and challenged variouscommercial assumptions and reflected actual data now obtained from the plantingprogramme and supply chain projects. Key assumptions for the Joint Ventureinclude: • Higher supply chain costs versus the position at the time of D1's most recent placing. For example, on a seed purchase model the D1 Board now expects costs to be approximately US$75 per tonne higher. These are the main driver of a higher estimate for the landed cost of jatropha assuming a 29 per cent oil content of US$575-625 per tonne. This is assumed to decrease over time as volumes increase permitting the Joint Venture to more efficiently utilise its supply chain. • A four year planting target of one million hectares as described above. The mix of planting should move towards contract farming with stronger partners using elite seed and see some increase in the proportion of managed plantations. Overall the Joint Venture is targeting 50 per cent. ownership of its gross planted hectares with partners accounting for the balance. • Yields from wild seed are anticipated to be 1.7 tonnes per hectare from mature, well-managed plantations. Yields from elite seed are anticipated to reach 2.7 tonnes per hectare on the same basis. Accounting for the Joint Venture The Joint Venture will be accounted for in accordance with IAS31 (Joint VentureAccounting) and SIC13 (Jointly Controlled Entities - Non-monetary contributionby venturers) and will be consolidated on an equity accounting basis within D1'sgroup accounts. As a result of this accounting treatment the D1 Board expects the Group torecognise a gross gain within its consolidated profit and loss account of£15.875 million. This gain will be reduced to reflect the value of the Optionand transaction costs associated with the formation of the Joint Venture. Trading Update As at 23 June 2007, D1 had planted or obtained rights to offtake overapproximately 172,000 hectares as summarised in the table below: Hectares Managed Contract Seed purchase and oil supply Total plantations farming agreementsIndia - 31,877 24,924 56,801Africa 3,638 20,760 16,646 41,044South East - 41,420 32,976 74,396Asia Total 3,638 94,057 74,546 172,241 D1's effective economic interest in the above planting after taking into accountthe interests of its partners is approximately 50 per cent. Commissioning work continues on the fifth D1 20 refinery unit that was recentlydeployed at Forty Foot Road. This D1 20 unit was installed in June 2007. At the time of its recent Annual General Meeting on 23 May 2007, the D1 Boardstated that the business was progressing positively. The D1 Board remains ofthis view and believes that the Group is well placed to realise its goals. Gross cash as at 31 May 2007 was £30.3 million. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
NEOS.LBP