Brazil’s Top Sugar Producer Sees Its Future In Ethanol
April 19th, 2008Cosan Ltd.
Sao Paulo, Brazil
(55-11) 3897-9797
www.cosan.com.br/en
Lead underwriters:
Credit Suisse, Goldman Sachs and Morgan Stanley
Offering price: $17.04
Expected date: week of Aug. 13
Ticker: CZZ
THE BUZZ
American farmers want to fill gas tanks with corn. But Cosan says it’s found a sweeter way to power Brazilian cars. The world’s second-largest sugar producer also is No. 2 in ethanol production.
It stands to pick up ground in both arenas.
First, populations in China and elsewhere are moving from the farms to cities. Historically, city dwellers consume more sugar.
But Cosan doesn’t just grow and process cane into sugar. It also ferments the stuff into ethanol.
It says its ethanol fermented from sugar cane produces more energy more cheaply than other sources, such as the corn used in the U.S.
Brazilians have embraced ethanol fuel on their quest for energy independence. In fact, more than 80% of new cars sold in Brazil today are so-called flex-fuel vehicles, able to run on the sweet fuel.
But Cosan says it’s not competing with oil companies any more. In Brazil, and increasingly in the U.S., ethanol is blended with traditional gasoline.
The company says that helps clean up emissions, giving the oil companies a green patina. It also helps them extend the lives of their petroleum reserves.
“Oil companies do not see ethanol any more as a threat,” Paulo Diniz, Cosan’s chief financial officer, said during the roadshow presentation. “Now they see it as an ally.”
Linda Killian, portfolio manager of Renaissance Capital’s IPO Plus Aftermarket Fund, says economics are driving demand for the company’s products, not government fiats.
THE COMPANY
Cosan traces its roots to 1936, when the Ometto family established a sugar cane mill in Brazil. It has grown ever since, buying up competitors and related businesses. The business is still in the family. Chairman and Chief Executive Rubens Ometto Silveira Mello is called by Forbes the world’s first ethanol billionaire.
RISKS/CHALLENGES
The Brazilian economy giveth, and it can taketh away. Rampant inflation has been a problem in the past, and could be again. The government can, and frequently does, step in. It can change tax, tariff and other monetary policies that may affect the business.
Sugar also is a highly regulated commodity. The global sugar market has grown since the 1990s. But many countries still have import restrictions, or can impose new ones to protect domestic production.
Currency fluctuations also are a potential drag.
Cosan’s expenses are in local reais, but some of its revenue comes in U.S. dollars. Its margins suffer when the greenback loses ground. Likewise, because it reports reais income in dollars, a strengthening U.S. currency can translate to lower results. There also are the risks that floods, droughts, disease or other calamities could disrupt sugar growing in the country.
While ethanol is a popular alternative to gasoline, some other technology could come along and catch on with automakers and consumers.
On the human sugar consumption side, Cosan said artificial sweeteners already have soured demand for sugar in some markets.
The company also is controlled by one person. Mello, through his class B shares, will have direct and indirect control over almost 91% of the voting power after the offering.
THE RESULTS
Revenue has steadily grown with demand for both sugar and ethanol. It lost $72.8 million in fiscal 2006, on revenue of $1.1 billion. But in fiscal 2007, it made $346.5 million, on $1.7 billion in revenue.
Fiscal 2007 got a one-time $89.3 million boost from the settlement of a legal case involving price controls.
USE OF PROCEEDS
Cosan expects to raise $1.6 billion from the sale of 100 million shares, or almost $1.9 billion if the underwriters exercise their options. It plans to spend more than $1 billion of that on two massive projects that will expand its cane-crushing capacity and ethanol output.
About $325 million will go for developing power plants for five of its mills. Another $100 million will fund the purchase of mechanical harvesters for its sugar cane. About $50 million will be used to increase crop yields and reduce production costs. About $25 million will go into field stations to identify sugarcane varieties suited to different regions of Brazil. The rest will go toward general corporate uses.
THE MANAGEMENT
Rubens Ometto Silveira Mello
Chairman and chief executive
Has been with Cosan and related companies since 1980, and has been chairman and CEO since 2000. Before joining Cosan, was adviser to the board of executive officers of UNIBANCO, () and chief financial officer of Industrias Votorantim. Holds a mechanical engineering degree from the Escola Politecnica of the University of Sao Paulo.
Pedro Isamu Mizutani
Chief operating officer and director
Joined a related company in 1983 as a planning director. Became financial manager and later financial director. Holds a master’s degree in business management from Fundacao Getulio Vargas in Sao Paulo.
Paulo Sergio de Oliveira Diniz
Chief financial officer and director
Joined Cosan in 2003. Also serves as investor relations officer. Was finance officer for Telecom Italia Mobile, responsible for finance and planning in Latin America. From 1992 to 1998, was treasurer for Swiss company Keramik Holding AG Laufen. Holds a master’s degree of business administration from International Management Development Institute of Switzerland.
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