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Mergers, Acquisitions Loom Over Brazil Sugar, Ethanol Indus

By Tony Danby

JANUARY 22, 2009, 12:04 P.M. ET

SAO PAULO (Dow Jones)–A wave of merger-and-acquisition activity may occur in 2009 in a Brazilian sugar and ethanol sector battered by the global credit crunch, according to sugar cane experts and analysts.

Brazil, the world’s leading producer of sugar and sugarcane-based ethanol, has seen billions of dollars poured into the industry during the past several years. As many as 200 sugar and ethanol mills have been created and were thriving during the periods of high gasoline prices. But now many mills are strapped for cash from the global credit crunch and face a shortage of funds to repay loans and for the working capital needed to survive.

Major Brazilian sugar and ethanol groups such as NovAmerica are looking for new investors or sources of finance. At least four groups, including Joao Lyra, which has three mills in Alagoas state and two mills in Minas Gerais state, have already entered judicial recovery, or bankruptcy-type, proceedings.

Analysts said international and local companies are already circling the Brazilian sugar and ethanol market. Companies such as Cargill Inc., Bunge Ltd. (BG), Archer Daniels Midland Co. (ADM), as well as ETH Bioenergia, the energy unit of Brazilian conglomerate Odebrecht, are all looking at a stakes in NovAmerica, or other struggling companies.

Brazil’s state-run energy giant Petroleo Brasileiro SA (PBR), or Petrobras, as well as Royal Dutch Shell PLC (RDSA) and BP PLC (BP) have also been reported as keen to grab assets in the ethanol segment.

“This year we should see 20 of Brazil’s 200 sugar and ethanol groups disappear via a wave of consolidation,” Plinio Nastari, a sugarcane expert and director of consultancy Datagro, told Dow Jones Newswires.

Mergers will take place among local companies as well as players from overseas as many smaller family-owned groups are taken over by larger predators, according to Nastari.

These groups often struggle to access credit from banks that are demanding strict guarantees and long, healthy track records. The loans also come with a sharp price tag as interest rates skyrocketed to between 20% and 25% from between 6% and 8% before the global financial crisis, he added.

Pedro Mizutani, chief executive of giant Brazilian sugar and ethanol company Cosan SA (CSAN3.BR), agreed that 20 or more groups should disappear this year.

Many of these groups are very small and badly managed, with a lack of agreement between shareholders on how to run the company, said Mizutani. “These companies will suffer until it [takeover] happens,” he said.

Cosan, which in August created a subsidiary called Radar Propriedades Agricolas S.A in order to identify and acquire rural properties, is already looking at opportunities to buy mills in Brazil. The company has been studying NovAmerica and has also held talks with Shell and others companies about possible joint ventures. “But nothing has been agreed,” the CEO said.

Mizutani also said that his company’s agreement with struggling sugar and ethanol group Atalla is purely to rent land and that Cosan doesn’t intend to acquire the group.

Despite such disclaimers, Cosan is widely viewed as having the financial muscle to do a deal. As an example, the company in December completed an issue of promissory notes worth BRL1.1 billion, mainly to pay for the acquisition of Esso, ExxonMobil Corp.’s (XOM) distribution and service-station business in Brazil. That highlighted the company’s financial muscle.

“If the right opportunity comes along, Cosan intends to make an acquisition,” said Mizutani.

Miguel Biegai, a sugarcane specialist at Brazilian consultancy Safras & Mercado, said companies with access to U.S. dollars will be in an especially strong position to buy Brazilian sugar and ethanol mills. The Brazilian real’s value has fallen around 40% against the U.S. dollar since July, so companies holding dollars have much more purchasing power. The U.S. dollar was at 2.34 Brazilian reals on Thursday.

He also said mills are more willing to sell due to existing debts and shortages of working capital. They may slash their asking prices by 20% or more compared to before the credit crisis, said Biegai.

Groups such as Cosan or international players probably will wait until the global economic climate is calmer before embarking on purchases, he added. More acquisitions are therefore likely in the second half of 2009.

Juliano Merlotto, a partner at consultancy F&GAgro in the Riberao Preto sugarcane region, estimated that brownfield sites are currently more attractive than greenfield projects. The investment costs for brownfield projects are around BRL50 per tons of cane crushing capacity against BRL200 per tons for greenfield sites, he said.

Meriotto said larger local sugar and ethanol players such as Cosan and Acucar Guarani SA (ACGU3.BR) may need to be cautious about making acquisitions because they have already notched up large financial commitments for such things as co-generation projects. This may put the brakes on some acquisitions, he said.

He said he expects experienced mid-sized mills, with good financial results and strong capital structure, to be more effective in the consolidation process. These mills may take control of majority positions in rival mills, he said.

New Investments
Brazil’s main sugar-cane association, or Unica, estimated that $6.2 billion was invested in 2008; $3.7 billion in 2007, and $2.7 billion in 2006 in the center-south sugar and ethanol sector.

Despite the expected increase in consolidation in 2009, most analysts believe overall investment will drop by between 30% and 50%. Nastari is especially pessimistic and suggests that investment could fall to as low as $500 million in 2009.

Biegai said many projects have already been halted in 2008 and others remain off-line this year due to a lack of credit. He said only around 20 mills will begin operations this year out of some 30 mills that were originally slated to start in 2009.

Brazil is the world’s No. 1 sugar producer and exporter. It is also the world’s No. 2 ethanol producer after the U.S., but No. 1 ethanol exporter.

-By Tony Danby, Dow Jones Newswires; 55-11-2847-4523; [email protected]


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