June 1, 2012
Interviewed by: David Snow
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Sugar Startup: How Gavea Backed Cosan

In 2010, one of the world’s largest sugar companies, Brazil’s Cosan SA Industria & Comercia, agreed to sell a $226-million stake in new logistics unit to two private equity firms: Gavea Investimentos and TPG Capital. In this panel discussion, three experts in Brazilian private equity analyze the deal.

“Sugar Startup: How Gavea Backed Cosan” features Marcos Marinho Lutz of Cosan, Christopher Meyn of Gavea, and Carlos Asciutti of EY Terco in Brazil.

In 2010, one of the world’s largest sugar companies, Brazil’s Cosan SA Industria & Comercia, agreed to sell a $226-million stake in new logistics unit to two private equity firms: Gavea Investimentos and TPG Capital. In this panel discussion, three experts in Brazilian private equity analyze the deal.

“Sugar Startup: How Gavea Backed Cosan” features Marcos Marinho Lutz of Cosan, Christopher Meyn of Gavea, and Carlos Asciutti of EY Terco in Brazil.

David Snow, Privcap: I’m very interested to hear the story of the investment of Gavea Investimentos into a division of Cosan, which is Rumo Logistica. This is the kind of transaction that is happening with greater frequency in Brazil, and it’s indicative of the fact that private equity now plays very big role in investing in and transforming Brazilian business. So I’m fascinated to hear from all of you.

So why don’t we start with a bit of background about how you two met each other, and what the circumstances were, and what were the motivations leading up to a partnership between Gavea and Cosan? Maybe we could start with Marcos.

When was it that you decided that your division needed something other than what the status quo provided?

Marcos Marinho Lutz, Cosan: In fact, this division was almost a start-up, and we had already a very large position as the leader in producing ethanol and sugar in Brazil, and we decided to move downstream on the infrastructure side. At that point, we put together a team and a plan. We had some assets already on the port side, and we put an integrated logistics plan for basically hauling bulk sugar from the state of Sao Paolo to the Santos port.

At that time, we owned a plan. We had 1.3 billion REIS of investments lined up, and we decided to finance part of that with that new equity. New equity, at that time, was not an option on Cosan, because our stock was trading on the lows.

So we went through a process of finding an APE partner. On this process, we had already a relationship with Gavea, because they were already investors on Cosan, in the public equity. Part of our board, and his relationship was proven, at that point, very, let’s say, smooth. So on this process, we at some point started discussing, what would be a way of bringing Gavea to this new business called Rumo, and again, the story tells, but again, this has been very successful so far.

Snow: Chris, as you assessed the opportunity initially to partner with Cosan on this investment, what were some of the attractions that you saw, and what did you look at to determine that this is going to be successful?

Christopher Meyn, Gavea Investimentos: Most investments or a process of, each firm with a different ranking, of, quote, checking the boxes of what makes sense for a deal before you go too far. For us at Gavea, we’ve always had a very strong first level ranking, which is partner quality. Marcos mentioned, this was the fruit of a relationship that started back two to three years before, with a very large relationship at the holding level at Cosan. Then a comfort with both the management team itself, but in their ability to execute plans that we were following from the beginning of our relationship. So we look at having a very proven partner, and there’s nothing better than to go back, so to speak, to the well, with a new investment.

Then you get into the merits of the transaction itself. You had an operational leader in a very important aspect of this business objective, which was the production and transport, already, of the primary product. You had many of the partnerships well-advanced or in place to to, let’s say, complete the loop on the integrated logistics.

And you have a situation, which is really the macro of Brazil. This is something that represents an investment in infrastructure, which is a well-known roadblock, or constriction point for growth. It’s revolving around the commodity market, particularly sugar and ethanol, which is an area we particularly are bullish on for the long haul. You have the ability to create investments of this nature that have very, very high return capability.

So while it’s a start-up, we feel that you’re looking at a situation that really, all the boxes were checked with class-A partners and capabilities. So for us, it was a very clear opportunity.

Snow: I’d like to dig a bit further into the details of your analysis of ethanol market, but maybe first a question for Carlos. As you look at the way that this deal came about and how it was structured, how is this indicative of, and how does this illustrate, some of the trends that are happening in corporate Brazil?

Carlos Asciutti, Ernst & Young Terco: It fits into having a source of capital, which is highly needed in Brazil, a source of know-how, a source of international understanding, which is key to Brazil. So it fits into what is really key to these entrepreneurs, is how do I get money to grow? How do I get know-how to have a better company? And sometimes, some of them look in– how do I grow outside of Brazil? So having international private actors, who are part of the international experience, is key to the market. So what I see fits very well.

Snow: What is going on in the sugar market in Brazil that is going to make your company more successful? What are you betting on, as far as trends?

Lutz: Brazil is a very, very dominant player in bulk sugar worldwide. I think there’s no other commodity that has a larger the dependency on Brazil than sugar. Last year we were responsible for more than 50% of the world exports, so this is a very strong footprint.

Sugar is a very resilient commodity. There’s almost no correlation between sugar consumption and GDP. So sugar consumption is a factor of human habits and number of people– let’s say, population growth. Human habits is something changing in China, mainly, where people in the countryside do not consume sugar, and when they move to the city, they start having, let’s say, more Western habits, and consuming sugar. Population growth is something happening in the developing world and not happening in the developed world.

So sugar is a commodity that has been growing on the 3 million ton to 2.5 million ton per year, which is steady in the last 30 years. So very, very little changes and big crises or big complicated moments in the world. So very resilient. Brazil has been capturing that growth, mainly, and the reason for that this is our availability of natural resources, human capital, some stability on the political side compared to other options, availability of water for agriculture. So all that combined pretty much put the marginal growth for sugar coming from Brazil in the long run.

Rumo plays a fortune role there, because we developed a dominant position also in sugar-hauling. We were responsible for 50% of the product exported incentives this year, in the 30 years of the project. So the project, in a couple of years, will be even more important for the local infrastructure.

Giving you a sense of what we’re talking here– we’re talking about roughly 1,000 trucks removed from the roads of Sao Paolo state, in one way, and 1,000 in the other way, empty, going back. So in the end, roughly 2,000 trucks per day, as an environmental impact for the region and for the country, so something very needed.

So the combination of the strong macroeconomic trends on the long run– I say “long run” because some weather changes and things like that can impact one or two years of the business plan. But in the long run, the fundamentals are quite strong. But the combination of that macro with more specific, industry-specific issue, which is the need for, let’s say, a more stable and reliable infrastructure for your exports, is pretty powerful.

Snow: Chris, going back to your earlier point about infrastructure, this seems to be part of a trend of, now that there’s greater demand for Brazilian products, the infrastructure that exists to get it to the end market is not sufficient to meet that demand. So it sounds like the Rumo Logistica plays directly into that.

Meyn: Yes, Marcos mentioned the environmental impact, the improvement on the stability of having a long-term  steady manner to transport and export sugar. It’s economic at the base, as well, as many of the infrastructure issues are.

It’s been fairly well-known in many commodities and many products, consumer products, Brazil has an advantage, whether it’s a natural advantage or a productivity advantage or a cost advantage. And many times, that pricing advantage is lost in the logistics chain, primarily due to the road and heavily truck-based transport system that Brazil has relied on for many, many years. That is really at the heart of where infrastructure investment can unlock value. Having an integrated logistic system for exported bulk sugar, for instance, not only takes trucks off the roads, but obviously creates an economic incentive for a sugar miller and a sugar transporter or exporter to switch to an integrated system with rail, import, and storage. It’s an unbeatable financial offer, as well.

The question is, where does investment come from? In a country that doesn’t invest well in itself, from a historical and current standpoint, it falls, in many ways, to the private sector.

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