Goodbye, ethanol
Rubens Ometto, the controller of Cosan, got tired of the sugar and alcohol industry’s “roller-coaster”—and, after investing upwards of 7 billion Reals, he is creating a new conglomerate. And there is no place for sugarcane in it. | MARCELO ONAGA
Rubens Ometto got tired of being the world’s biggest refinery owner. Holder of a fortune estimated at 2.7 billion Dollars, which makes him the 19th richest Brazilian national, he has produced more ethanol from sugarcane than any other entrepreneur in history. Ometto spent each of his 62 years around sugarcane farms: he was born and raised in a sugar refinery founded by his grandparents in Piracicaba, in the interior of the state of São Paulo—and, since then, he has experienced a bit of everything, in a cyclothymia typical of an industry that is either broke or in the money. He almost went bankrupt and fought with his family (including his mother) for control over the company. With cold blood and an enormous disposition for risk, he bought out his messed-up competitors until he became the largest absolute plantation owner of a conglomerate that crushes 124 tons of sugarcane per minute. Ometto is what he is today because of sugarcane—but, a while ago, he commenced a surprising change of directions: all his recent investments were made in areas that have nothing to do with sugar or alcohol. His latest and most daring step in this direction was taken in early May. For 3.4 billion Reals, he completed the purchase of Comgás, the largest natural gas distributor in Brazil. It is the biggest acquisition of his life. “The sugar and alcohol market is a roller-coaster,” said Ometto to EXAME. “I am investing in more stable industries.”
The purchase of Comgás was the apex of a movement started four years ago. That was when Ometto spent 1.5 billion Reals to buy the Esso chain of fuel stations from American outfit Exxon Mobil. Less than a year later, Ometto and British-Dutch company Shell announced the merger of their operations in Brazil, creating Raízen, the fifth largest company in the country, with earnings worth 50 billion Reals. All the Cosan refineries and Esso fuel stations were included in the deal, in addition to the Shell fuel stations. The contact also included Cosan debt of 2.5 billion Reals and a 1.6 billion Real contribution from Shell. With the deal closed, the executive went off to create a new conglomerate. He founded a logistics company, called Rumo. He also created or bought food, energy cogeneration, lubricant and land management companies. In February, he offered 900 million Reals to enter the controlling group of ALL, the nation’s largest independent logistics operator. Now, with the Comgás acquisition, Ometto is extending his transformation even further. The sales of ethanol, sugar
and electric energy generated from burning sugarcane bagasse, that a little over three years ago represented 100 percent of Ometto’s business, will now account for 18 percent of Cosan’s earnings in 2012. If all of the deals are closed, Cosan’s earnings will top out at 30.5 billion Reals and the group will become one of the 15th largest in the nation.
It is an unprecedented change of course. Diversifying a company’s business and, thus, reducing its risks, is a decision that has been on the radar screen of executives and businessmen the world over. A recently-concluded study of the Boston Consulting Group shows that groups that don’t depend on just one business were better off during the crisis (read the report on p. 94). This is natural, since businesses that are doing well can help maintain the ones that are not fairing so well. What draws attention in the case of Rubens Ometto is the magnitude of the metamorphosis his company has been going through. Since 1936, when it was founded, until 2008, after all, Cosan did basically one thing. It bought sugarcane from producers, turned the feedstock into sugar or alcohol and then sold them. The company’s success and the fortune Ometto accumulated are proof positive that all that simplicity worked very well for seven decades. But in a woeful five years, as was seen, that reality was turned inside-out: in the process, Ometto spent upwards of seven billion Reals in acquisitions and investments.
METAMORPOHSIS
Allied to the most recent acquisitions, the creation of Raízen, two years ago, is the greatest evidence that, to Ometto, the future is not in sugarcane. The signing of the agreement split his companies into two. The refineries and fuel stations are under Raízen. Any activity that is not related to sugarcane or to fuel distribution is 100 percent Ometto’s and was not included in the joint venture with Shell. The agreement between the two provides that, in January of 2020, Shell will have the right to buy the 50 percent Cosan holds in the company. In case the multinational opts to
exercise its right, Ometto can, in turn, refuse the offer and sell only 25 percent. But five years later, no matter the scenario, Shell will have the option to buy everything and take over 100 percent of the business. If it does not exercise its right, Cosan can buy all of Shell’s stakes in Raízen, something considered unlikely. “The agreement looks a lot more like an acquisition operation than a joint venture,” says Salim Morsy, a Bloomberg New Energy Finance analyst. The businessman says Raízen will continue to invest in ethanol and sugar and that it has no interest in selling its shares. But it also says it does not tear contracts up. “If Shell wishes to exercise its right to buy, I will sell.” In this case, Ometto would leave behind his historic relationship with refineries, because they would be taken over by the multinational.
“If I were to run the company the way the market wants, it would be better to put an analyst in my place,” remarks Ometto
Behind Cosan’s metamorphosis is a confirmation from Ometto—the best way to protect his assets is to leave them out of the ebb and tide of the sugar and alcohol industry. In the last 30 years, Brazilian refinery owners went through three major crises. In 1985, oil prices dipped low, knocking down ethanol prices. Four years later, there was a sugarcane shortage in Brazil (and those who had cars at the time remember the lines to fill ethanol-fired vehicles). In 2008, credit dried up and an unprecedented refinery liquidation phase ensued. “It doesn’t make sense to have a business with years of high profits and other years with losses that can affect its financial health”, says Ometto. “That’s how the sugar cane industry is.” His family’s refineries went through a near-death experience in the 90s, when they were in too much debt (they owed more than their annual revenues). The businessman fought with his relatives because he defended joining all their refineries into a single group (he, of course, would be the person in charge), a way to increase efficiency. That’s when he fought with his mother, who was against the deal and took the issue to the courts. Ometto, the son, ended up winning—and at the end of the process, Cosan was born. Naturally cautious, since then he has looked for ways to reduce the level of risk of his business. The first step was to increase power cogeneration at the refineries. In the last decade, the company invested two billion Reals in this niche. With prices regulated by the government in long-term contracts, power ensured constant revenue, acting as a form of insurance for sugar and ethanol in case of a harvest bust. The cogeneration revenues, however, did not support the company’s growth needs. That was when Ometto noticed that, to defend his assets, it would be necessary to take another step.
What happened from there was a sequence of deals that were absolutely faithful to Ometto’s style, one of notorious aggressiveness. When he started his post-sugarcane expansion plan, from the get-go, he entered a war with Cosan’s minority shareholders. To increase his investment capacity without running the risk of dilution if things went wrong, Ometto create a company in Bermuda to control Cosan. In the company based in the fiscal heaven, the Brazilian would have guaranteed control because of a special class of stock—which he could not do in Brazil, since his company is listed on the Bovespa’s “Novo Mercado” (New Market), a segment listing companies which, in theory, complied with high principles of governance and transparency. This was not well-taken—actually it was very poorly taken—,the shareholders complained, but the operation went forward. This style was also repeated in acquisitions. Cosan became what it became because Ometto nourished an uncommon taste for taking companies over using borrowed money ( the competition would quickly spread the news that the debt was not payable and that it would not be long before he was broke). The company was born with seven refineries. Today, it has 24. The entrepreneur repeated the process when it came time to diversify. His proposal of two billion Reals for Esso was above Petrobras’, at the time the absolute favorite to win the auction. With the recent offerings for ALL and Comgás, Ometto will double Cosan’s debt, which will be close to seven billion Reals—the risk rating agencies soon threatened to lower the company’s rating.
THE FAD IS OVER
Ometto, as usual, doesn’t care about the yellow light that lit up in the financial market. “If I were to run the company the way the market wants me to, it would be better off putting an analyst in my place”, he says. The most skeptical analysts also criticize the lack of connection among the businesses. What does gas distribution have to do with cargo transportation? To refute the criticism, Cosan executives like to cite the example of Rumo Logística, a company created in 2009. Ometto invested 1.3 billion Reals
on the purchase of 72 locomotives, 800 cars and on the duplication of railway sections close to Santos to create Rumo. The investment was good for the productivity of the company’s sugar interests: The unloading operation of a car at the port of Santos, which used to take 45 minutes, was done in 40 seconds after Rumo was created. The businessman states that any company that operates in the markets he is interested in will be in his sights to, at the end of the process, create his clean energy and logistics conglomerate. Ometto’s “get-up-and-go” style worked out in the sugar and alcohol industry. Will it work out in the new phase? This is not known, but this time, he at least starts off with the benefit of the doubt.
The government keeps the price of gasoline artificially low—which is terrible for ethanol
Five years ago, Rubens Ometto’s wave of investments in anything that was not connected to sugarcane would be unthinkable. After all, Brazil was at the peak of euphoria around ethanol—treated by Brasília as the great economic calling of the county, destined, as it was to supply clean energy to a world hooked on oil. Three companies operating in the industry had IPOs and were listed on the São Paulo stock exchange. At the height, in 2008, investments in the construction of new refineries topped at 10 billion dollars. That was when the ethanol promise attracted great names of worldwide capitalism of the likes of investor George Soros and the founder of AOL, Steve Case. In the field, the image of the refinery owners was illustrated by a notable modernization, substituting day laborers for machines, government money for private money, complaining for growth. The old sugarcane, brought to Brazil by Martim Afonso de Souza almost 500 years ago, symbolized a new country, green and modern (then-president Luiz Inácio Lula da Silva stated, in a famous speech, that refinery owners went from “bandits to world heroes” and those that criticized ethanol had their hands “soiled in oil”). Ometto was at the forefront of this process. Cosan’s IPO, in 2005, was a high mark in the industry’s history. His reach for scale lead the refineries to unparalleled efficiency in an industry eroded by years of rudimentary administration.
The fanfare would soon end. It is symbolic that Cosan is exactly the company that, little-by-little, is undoing its investments in sugar and alcohol to make money elsewhere. It is a reflection of a county that had an intense, even if brief love affair with renewable energy. By late 2008, in the midst of the financial crisis that would shake Brazilian refineries’ finances, Petrobras started prospecting the oil reserves nestled in the pre-salt layer. It was the mother of ironies. The federal government soon forgot ethanol. Oil, to repeat Lula’s metaphor, went from “bandit to hero.” Since the ethanol market is currently highly regulated and dependent upon Brasília’s moods, the discovery of the pre-salt was decisive. The government, which had been helping, started getting in the way. For over a year, Petrobras has maintained gasoline prices artificially low, a way of containing inflation. Since the price of ethanol is directly linked to that of gasoline, producers cannot pass on the cost increases that they may have due to harvest issues. The profit margins, in this scenario, vanish. To make things worse, the government has been reducing gas taxation by reducing the Contribution for Intervention in the Economic Domain. The tax, which represented 15 percent of the price of gasoline in the middle of the last decade, now has a weight of only two percent. Brazil is going the opposite way of the world, which grants fiscal incentives to clean fuels,” says Marcos Jank, former chairman of the sugar and alcohol producers association. For the consumer, the most visible consequence of this attitude is that, since mid-2009, filling up with ethanol is no longer worth it in most Brazilian states.
For refinery owners, the moment for the government’s change of heart could not have been worse. In the last three years, Brazil has gone through a bothersome series of busts in sugarcane harvests. Some refineries, such as Santelissa Vale, which belongs to French group Dreyfus, crushed 30 percent less than their rated capacity during the last harvest. The result is an industry that is highly indebted and experiencing a decline in productivity. The sugarcane industry’s debt skyrocketed from seven billion Dollars, in 2006, to more than 25 billion Dollars last year. Sugarcane field productivity dropped 20 percent in the last four years. A deep crisis installed itself, therefore, in the sector. Big multinationals, like Indian outfit Renuka, Spanish company Abengoa, and Singapore enterprise Noble, are among those seeking buyers for their interests in the country. And in 2011, Brazil, which promised to fuel the world with its ethanol, imported more than a billion liters of ethanol made in the United States.
If ethanol slumped into crisis that quickly, is there not a chance it could come back into style just as quickly? The pre-salt discovery did not change at all the advantages of Brazilian ethanol. It remains renewable. It is still less polluting than gasoline. It is also still more efficient than ethanol made from American corn. With oil prices hovering around 100 Dollars, it is feasible to imagine that the discussion around the feasibility of renewable fuels will resurface sooner or later. For Brazil, a market strong on ethanol would be welcome, because the country truly holds a unique position in terms of productivity. The fact is, however, that the recent hiccup reinforced an old fear: it is not safe to invest in ethanol, because, sooner or later, a new crisis will come around. If the biggest refinery owner in the world does not trust it, who can?
“I WANT STABLE BUSINESSES”
RUBENS OMETTO, CHAIRMAN OF THE BOARD OF COSAN, EXPLAINS THE COMPANY’S DIVERSIFICATION STRATEGY AND TALKS ABOUT LIFE AFTER ETHANOL
MARCELO ONAGA
At age 62, entrepreneur Rubens Ometto continues taking care of Cosan’s strategy, a company he founded in 2000 when the family’s refineries merged into a single group. Today, Cosan makes 28 billion Reals—adding the acquisitions of ALL and Comgás, the number could be as high as 30.5 billion. Ometto says he still believes in the future of ethanol. But he is investing in diversifying his conglomerate’s businesses with activities that steer clear of the sugarcane industry’s volatility and says he is ready to leave the businesses his grandparents started in 1936.
In the last few years, you have forged associations and bought business outside of the sugarcane industry. Where do you want to go?
We are a company that is geared toward clean energy and to the logistics area. We are always aware of deals that are connected to Cosan’s activities, but sometimes we see synergy where no one else does. That is where our art is. I imagine where I can get by taking company over, what gains it will afford. The competition doesn’t do that, it is very relaxed.
When did you decide to diversify your businesses?
The sugar and alcohol market is a roller-coaster. After Cosan’s IPO, we began to be blamed by the shareholders, who did not understand the industry’s volatility. I started to look for more stable businesses, with guaranteed revenues. Energy cogeneration was the first, then came fuel distribution and all the others.
Are these acquisitions and the clause that allows Shell to keep Cosan’s entire sugarcane operation a sign that you are leaving the industry?
We have a great partnership with Shell. Not that long ago, the CEO of the company, Swiss national Peter Voser, gave me a fossil that was few million years old and told me our partnership would last the same amount of time as the fossil. I don’t see why I should leave, I believe in the sugarcane industry; the company’s diversification has allowed it to capitalize and to be well-positioned to take other refineries over when the industry’s situation worsens. We will invest in ethanol.
But you signed an agreement that gives Shell the right to buy your share of Raízen by 2025.
If they wish to exercise the right, I will sell. No problem at all. I don’t tear up contracts.
You were born in a refinery and your life has been deeply tied to the industry. Are you ready to live far away from the sugarcane fields?
One needs to know how to get old. I’ve done everything at Cosan. I spent weekends analyzing balance sheets, I drafted export contracts myself and have even slashed sugarcane. Today, I am 62 years old, I don’t want to be as involved. I have a young and excellent team that knows how to do the work. I just stay on top of them and demand a lot. Fifteen years from now, I will be 77 and I will want to be even less involved with the businesses.
Does the creation of a “new” Cosan, one which is more stable, without businesses that are linked to the sugarcane industry, have something to do with that?
It is not related to my aging, rather with the company’s perpetuity. It doesn’t make sense to have a business with years of high profits and other years with losses that can affect its financial health. That’s how the sugarcane industry is. The Comgás deal will increase the company’s debt, but that is alright, it has a constant cash flow. If I make an investment like this in sugarcane and I get into a price decrease period like the current one, I will go broke. If tomorrow I want to sell Comgás, I’ll find a buyer right on the spot. If I try to do that with a sugarcane refinery, no one shows up. They say I am very aggressive, but I do the math, I plan everything very well.
Do you still believe in ethanol as a fuel that can win the world over?
I believe in it a lot. It is a clean fuel that can get better. We are going to increase its productivity, we are investing in technology to develop improved sugarcane seedlings and also in second generation ethanol, made from cellulose, like from sugarcane bagasse. But there must be stable, predictable policies. I cannot invest when fuel prices are frozen. There is a lot of insensibility that hinders the industry. São Paulo has the potential to generate as much energy from sugarcane bagasse as the Itaipu hydropower plant does. But instead of incentivizing this, the government taxes the industry 43 percent and encourages the construction of hydroelectric plants in the Amazon.
You were heavily criticized when you held an IPO for a company on the New York stock exchange to control Cosan without holding the majority of the tock. Are you going to make an offer to Comgás’ minority shareholders ?
We will do everything that the law tells us to. Roughly four percent of the common stock is on the market today, which should get 80 percent of the premium paid to BG. With respect to the old criticism, I should say I never used any special right to secure an advantage. But I couldn’t become vulnerable to a possible takeover of the company.
Do you plan to merge the controlling company, which is traded on the New York stock exchange, with Cosan S.A.?
We have studied some options and we will do this. But only when I can guarantee control over the company.
Are you the last one in the family involved with sugarcane?
I don’t know. As far as I am concerned, no family member will be involved in management. They will be prepared to actively participate on the board.
To create Cosan, you had to fight with your brothers and even with your mother. How is your relationship with your family?
Everything has been resolved, we have a great relationship. One of the things that makes me the most proud is knowing that I delivered to them everything I promised and that they recognize that.
thebrazilianeconomy.com |
