Brazil: Prices in the clouds drive ethanol growth organic


John Rumsey
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Brazil’s market-leading ethanol producer, Cosan, recently made a U-turn on strategy that says a lot about the overheated market for the chemical. The firm rushed out announcements that it would shift from an acquisitive strategy to one that emphasized organic growth, including upgrades of existing facilities and mechanization of the sugar harvest, as well as expansion in less-competitive geographical areas. It blamed prices that it said were "in the clouds" for the rethink. At a hastily convened press conference, managers said that the price of acquisitions in the sector had risen by 147% between April 2005 and January to April of this year, according to the firm’s own calculations.

The price rises and overhaul of strategy confirm a wider sense of growing alarm at the amount of foreign and domestic money being thrown at Brazil’s highly fragmented and mostly family-owned sugar-ethanol industry (the top five players control just 17.4% of the market) and its ability to absorb cash sensibly through acquisitions. Marcus Regueira, chairman of the Brazilian Association of Private Equity and Venture Capital, thinks that acquisition prices should deter investors from buying the most sought after land and facilities and that the giddy increases are making negotiations ever more sticky as asset owners hold out for higher prices, especially in hot spots such as Ribeirão Preto in São Paulo state. Intelligent money is sitting out the boom, he reasons. At current trends, investments in the industry are likely to be as much as $2 billion to $3 billion this year, he believes. Private equity funds have been highly active. At least five large-scale deals are under way, including land, mills and distilleries, and include majority and minority stake investments, acquisitions and greenfield facilities.

Spiralling land prices

Marcelo Junqueira, São Paulo-based non-executive director at Brazilian ethanol specialist Clean Energy Brazil (CEB), agrees that land prices in some areas have spiralled and adds that he is seeing price gouging by suppliers of equipment, such as boilers and milling apparatus. CEB is partnering with asset owners rather than attempting outright acquisition. The firm recently invested in Usina Cidade Gaúcha (Usaciga) in Paraná in northern Brazil. Instead of an acquisition, CEB is providing $123 million in cash for expansion and modernization. It has an indirect 49% stake and the family retains 51% in a new holding company, Usina, with joint management control. Money will go to expand the mill and build two new ones, as well as providing stakes in a port and trading company. CEB, which raised £100 million ($197.8 million) in an IPO on London’s Alternative Investment Market in December 2006, saw its shares trade up to 122p on May 10, from the initial price of 100p.

Cosan, which is the undisputed industry leader, even with a paltry 9% market share, carried out an IPO in November 2005, raising $403 million. The money was destined to help it grow, with a strong emphasis on acquisitions. The company did indeed make four acquisitions between April 2005 and April 2006, including that of Corona for close to R$400 million ($200 million) in February 2006. Although it participated in the acquisition of Usina Santa Luzia this April, that was through a partnership with other firms. Part of the plan there is to increase mechanization. Modernization of mills and distilleries and looking outside the key growing areas are the present trend in the ethanol industry.