How to convert text area data into select list in forms?
As requested in the comments, in answer format:


Use the explode() function on your string
Loop through the results and split each entry
Add the result to the options array you feed to the select box


Eg.

$options = array();
$lines = explode(PHP_EOL, $entityoptions);
foreach($lines as $line) {
  $line = explode('|', $line);
  $options[$line[0]] = $line[1];
}