Cosan and Shell Join Forces - Analyst Blog

Cosan S.A. and Shell International Petroleum Company Limited signed a binding agreement to form a $12.00 billion joint venture for the production of ethanol, sugar and power, and the supply, distribution and retail of transportation fuels. Regulatory approvals are still awaited.

 

Brazil-based Cosan Limited (CZZ) holds approximately 62.3% of the controlling share of Cosan S.A. Shell International Petroleum Company Limited is a leading energy and petrochemical player.

 

The joint venture will be one of the largest ethanol producers in the world with 2 billion liters of annual production capacity. Also, the deployment of next generation biofuel technologies will be made easy through Shell’s equity interests in Iogen Energy, a company producing cellulosic ethanol and jointly owned (50:50) by Iogen Corporation and Shell, and Codexis, a leading provider of optimized biocatalysts.

 

Electricity will be produced from sugar cane bagasse in the cogeneration plants (ten already operational). The joint venture’s distribution business, having annual sales of about 18 billion liters of fuels, will be carried out in roughly 4,500 retail sites.

 

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

 

Shell’s total contribution of $4,925.0 million will include $1,625.0 million of cash contribution, downstream assets and aviation fuel businesses in Brazil , 50% interest in Iogen Energy and 14.7% interest in Codexis. These 2G technology assets and earn-out mechanisms could result in future cash contribution estimated to be $300.0 million by Cosan.

 

We believe the Cosan–Shell joint venture will result in better access to the ethanol consumer market, increased competitiveness in biofuels and fuel distribution businesses, better scope for development of second generation technology, improved debt ratios through more capital and increase in cash profile, and better growth prospects.

 

We currently maintain our Neutral recommendation on Cosan, supported by Zacks #3 Rank (Hold).