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Raizen Receives Regulatory Approval

Zacks Equity Research

Almost two years after its formation; Raizen, the joint venture between Brazil’s sugar and ethanol manufacturer, Cosan Limited (CZZ) and Royal Dutch Shell plc, received unconditional approval from the country’s antitrust regulatory body, the Brazilian Economic Defense Administrative Board (:CADE).

Raizen, a combination of Portugese words for root and energy, was formed on August 25, 2010 through a binding agreement between Cosan and Shell. The primary focus of the combined entity was the production of ethanol, sugar and power along with the supply, distribution and retail of transportation fuels.

The joint venture, considered to be one of the largest ethanol producers in the world, is anticipated to have 2.2 billion litres of annual production capacity and 23 ethanol plants with annual sugarcane crushing capacity of 62 million tons.

Within the joint venture, Cosan’s total contribution in the form of sugar and ethanol assets, cogeneration plants (7 existing, 2 under construction, 6 yet to be built in 3-4 years), downstream assets, and stake in Uniduto was roughly US$4,925.0 million. The company also assumed net debt of approximately US$2,524.0 million related to assets and in addition, $500 million of additional debt from BNDES.

Shell’s total contribution of US$4,925.0 million included $1,625.0 million of cash contribution, downstream assets and aviation fuel businesses in Brazil, interest in logen Energy and Codexis. These 2G technology assets and earn-out mechanism could result in a future cash contribution, estimated to be US$300.0 million by Cosan.

In our opinion, the Cosan-Shell joint venture has enabled better access to ethanol consumer market and resulted in increased competition in biofuels and fuel distribution businesses.

Cosan currently has a Zacks #2 Rank, translating into a short-term (1-3 months) Buy rating while its nearest competitor Archer Daniels Midland Company (ADM) bears a Zacks #3 Rank, indicating a Hold rating.

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