Shell has become a giant in the sugar business through a $12bn tie-up with Brazil's Cosan, which has added global ambitions to an initial business plan outlined six months ago.
The oil group is to place its Brazilian distribution and retail networks, airport refuelling assets and $1.6bn in cash to the joint venture, which will takeover Cosan's title as the world's top sugar cane processor.
Indeed, Cosan, also Brazil's biggest ethanol maker, is to contribute its sugar and biofuel mills and its own fuel selling assets, besides more than $2.5bn in debt.
However, while these contributions were envisaged by an outline agreement in February, Cosan has also consented to add in extra energy assets and some debt owed to Brazilian development bank BNDES, while the tie-up has also taken on worldwide ambitions.
The companies "have agreed since the memorandum to broaden the scope of the proposed joint venture to become a global player in sugar-based ethanol and sugar production", Cosan said.
While the groups are currently competitors in the Brazilian fuel market, they "will now focus on securing required regulatory approvals", with the aim of forming the joint venture in the first half of next year..
Takeover spree
The announcement comes amid a wave of consolidation in the world sugar sector, which has already seen US agribusiness giant Bunge buy into Brazil's cane ethanol sector this year. Last month Singapore-based commodities giant Wilmar bought CSR, Australia's top sugar producer.
The deal spree has been attributed in part to robust sugar prices which, after slumping from February's 29-year high of 30.4 cents a pound in New York, have recovered to about 20 cents a pound.
Sugar, besides being one of the most efficient sources of bioethanol, is seeing growing demand from human consumption from growth in population and affluence, particular in Asia.
Many sugar companies in Brazil, the top producer of the sweetener, have been forced to turn to well-heeled investors after running up heavy debts at the end of the last decade to fund expansions, borrowings which laid them low when the credit crunch struck.
Small print
For Shell, the joint venture will "enchance growth prospects in ethanol production globally", besides improving prospects for Brazilian fuels sales, said Mark Williams, the company's downstream director.
"Over the next 20 years, sustainable biofuels are one of the most realistic commercial solutions to reduce carbon dixoide emissions from transport," he added.
Under the agreement, Shell will take charge of the joint venture's fuel sales division, while Cosan will retain the major voice in sugar and ethanol production
The companies will have a 50:50 interest in the top management company, the tie-up's "face to the market".
The agreement also lays down mechanisms for the companies to buy eachother out of the venture – one trigger being the death of Rubens Ometto Silveira Mello, Cosan's chairman and controlling shareholder.
Shell shares closed 1.0% lower at 1,703p in London.
In Sao Paolo, Cosan stock ended 1.6% higher at R$23.50.
© Agrimoney.com 2010
