Ethanol producer VeraSun Energy said Thursday it will acquire fellow ethanol maker US BioEnergy, a move that analysts say will help VeraSun defend its bottom line from the shrinking margins permeating the biofuel industry.

VeraSun (NYSE: VSE) will pay 0.81 shares of its stock for every outstanding share of US BioEnergy (NSDQ: USBE) common stock. Based on Wednesday's closing prices and 79.6 million US BioEnergy shares outstanding, the deal would be worth $686.2 million.

Once the two join forces under the VeraSun name, the company is expected to have a market cap of $1.5 billion.

The company also will have nine ethanol-production plants, with seven more under construction.

By the end of 2008, the combo-company is expected to have a total production capacity of more than 1.6 billion gallons per year.

The merger will make VeraSun a strong contender against the United States' No. 1 ethanol producer, Archer Daniels Midland, said Michael Tian, a Morningstar equity analyst, in a research note.

ADM has 11.4 percent of the country's ethanol-production capacity, according to research firm New Energy Finance. The firm said VeraSun holds a 4.8-percent piece of the ethanol producers' pie, while US BioEnergy's sliver is 4.3 percent.

VeraSun CEO Donald Endres will remain head honcho and US BioEnergy CEO Gordon Ommen will become chairman once the merger is complete.

Wall Street liked the deal, pushing VeraSun's stock up 9 cents, or 0.85 percent, to $10.73 per share, and lifting US BioEnergy shares 32 cents, or 3.99 percent to $8.35 per share.

"This is a great acquisition for both companies," said Kelly Dougherty, a Calyon Securities analyst.

She said the merger will help VeraSun deliver more ethanol at lower costs, which is especially important as the industry suffers from tight margins in a time of high corn prices and low ethanol prices.

Two years ago, corn prices were at $2 per bushel; now they are above $3 per bushel, according to Canaccord Adams research.

VeraSun has been among those to feel the financial pinch. In October, the company postponed plans to grow its production capacity and suspended construction of a 100-million-gallon ethanol refinery in Indiana (see Ethanol's Tough Times Continue and Ethanol Margins Suffer).

But it appears the company has found a new way to expand. As Dougherty sees it, VeraSun won't be the only company looking to merge or acquire.

According to New Energy Finance, 47.5 percent of U.S. ethanol is made by "small producers."

Dougherty said these small companies, making 50 million gallons or less annually, will feel the pain first and suffer from the tightest margins. Scaling up ethanol production -- whether by building or buying -- is key to bringing costs down, she said.