Petrobras Steps Into Brazil Ethanol Consolidation

Consolidation in Brazil's sugar and ethanol sector continues to motor ahead with a new ethanol joint venture between state-run oil giant Petroleo Brasileiro SA (PBR, PETR4.BR), or Petrobras, and sugar producer Sao Martinho SA (SMTO3.BR).

Petrobras said on Monday that it will pay 420.8 million Brazilian reals ($239 million) for the 49% stake in the joint venture company called Nova Fronteira Bioenergia S.A., which will operate two mills in Goias state.

The deal marks the third big play by an oil major in Brazil's fragmented--but rapidly consolidating--ethanol industry, with companies jockeying for a slice of the world's largest center for sugarcane-based ethanol production.

"This is another sign of Brazil's sugar and ethanol sector quickly consolidating and there is plenty of room for more deals," Julio Borges, president of JOB Economia, a company specializing in sugar and ethanol in Sao Paulo, told Dow Jones Newswires.

Oil companies such as Petrobras and even troubled BP PLC (BP) as well as Cosan Industria e Comercio SA (CSAN3.BR), the world's largest sugar and ethanol group, and Archer Daniels Midland (ADM) are all open to making more acquisitions in Brazil's ethanol sector, Borges said.

Borges said that the market will be increasingly dominated by large, well-capitalized companies. "This is just the start," he added.

Monday's deal follows Petrobras's move in May to take a 45.7% stake in sugar group Guarani for 1.6 billion Brazilian reals ($911 million). Guarani is Brazil's fourth-largest sugarcane miller.

In February, Royal Dutch Shell PLC (RDSA, RDSA.LN) made the largest foreign investment ever in Brazil's ethanol industry in a $12 billion tie-up with Cosan. That followed BP's 2008 purchase of a stake in Tropical Bioenergia SA.

Elsewhere, last year U.S.-based Bunge Ltd. (BG) acquired Usina Moema Participacoes SA and France's Louis Dreyfus Commodities purchased giant sugar and ethanol group Santelisa Vale. Cosan also snapped up local milling group NovAmerica.

Monday's deal benefits both Petrobras and Sao Martinho, Borges said. Petrobras secures the know-how and expertise of a major sugarcane milling group, while Sao Martinho gets the financial backing of Petrobras, he said.

Nova Fronteira will include Sao Martinho's Usina Boa Vista S.A. ethanol mill and the SMBJ Agroindustrial S.A. greenfield project in Goias state. Usina Boa Vista currently crushes about 2.5 million metric tons of sugarcane annually, with plans to boost capacity to 7.0 million tons by the 2014-2015 harvest, Petrobras said.

Bruno Zaneti, a risk consultant at FCStone in Campinas, agreed that the latest move is part of a shift from family-owned mills. "Many small mills face heavy debts and they will continue to face selling pressure from big players," he said.

The move also shows an ongoing migration to the center-west region from the traditional center-south sugarcane growing region, which accounts for 90% of the country's sugar output at present.

Farmland is available in states such as Goias to grow cane at cheaper prices. But it will require hefty investment in fertilizers and logistics to reach the main coastal ports for ethanol and sugar export, Zaneti said.

Petrobras and Sao Martinho will share control of Nova Fronteira, with each company electing three members to the six-person board.

-By Tony Danby and Jeff Fick, Dow Jones Newswires; 55-11-3544-7074; Anthony.Danby@dowjones.com

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