Cosan-Shell JV Receives EU Approval - Analyst Blog

Cosan Limited's (CZZ) previously announced joint venture with Shell International Petroleum Company Limited, a leading energy and petrochemical player, received unconditional regulatory approval from the European Union. The companies anticipate that the transaction would consummate in the first half of 2011.

The two companies, earlier on August 25, 2010, had signed a binding agreement to form a $12.00 billion joint venture for the production of ethanol, sugar and power along with the supply, distribution and retail of transportation fuels.

The joint venture will be one of the largest ethanol producers in the world with 2 billion litres of annual production capacity. Also, 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 litres of fuel 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 yet to be built in 3-4 years), downstream assets, and stake in Uniduto will be roughly US$4,925.0 million. The company will also assume 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 will include $1,625.0 million of cash contribution, downstream assets and aviation fuel businesses in Brazil, about 50% interest in logen Energy and a 14.7% interest in 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.

Currently, the joint venture is being reviewed by the Brazilian Competition Authority (CADE) and will also require fulfillment of certain regulatory conditions before its operations.

In our opinion, the Cosan-Shell joint venture will enable better access to ethanol consumer market and result in increased competitiveness in biofuels and fuel distribution businesses. The dual enterprise will also offer better scope for development of second generation technology with 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 a Zacks #3 Rank (Hold).