FOREIGN INVESTMENTS ON THE RISE IN BRAZIL

Note: the following piece was extracted and translated from "Valor Economico", the Brazilian equivalent of the "Wall Street Journal". Some parts have been condensed.

by Mônica Scaramuzzo

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June 12^th, 2006

The Evergreen fund, created by English investors to bet on the up and coming ethanol and sugar business in Brazil, plans to invest an additional R$ 170 million (approx. US$ 77 million) in a new refinery in the country. Evergreen entered the ethanol and sugar business in November 2005, after acquiring a majority of the shares of the Alacana refinery, located in Nanuqe, in the north of Minas Gerais state.

The company also stated that it is analyzing other assets in the same field, in order to broaden their participation. The fund plans to purchase at least one other refinery and to build a third, in an undisclosed location.

Evergreen’s investments strengthen the growth tendency for foreign investments in the field. At present, there are five international groups with direct investments in Brazil - Louis Dreyfus, Tereos, Adeco Agropecuaria, Evergreen, and Kidd & Company, which is negotiating the purchase of Coopernavi, from the Brazilian state of Mato Grosso do Sul (see chart). Together, they are responsible for 4.5% of the production of sugar and ethanol in Brazil’s huge Midwest territory, an area second in size only to the Amazon region, in the country’s northern part. This percentage equals 15 million tons, out of 336 million tons in the 2005/06 harvest.

As a comparison, Cosan, the largest sugar and ethanol company in Brazil, with sixteen refineries, has a slice of 8.7%, or 28.5 million tons, of sugar cane production in the Brazilian Midwest. The group itself, which went public in late 2005, has sold shares to foreign investors.

Of the company’s total capital, 58.4% are controlled by Rubens Ometto de Silveira Mello, the group’s president. 12.1% are divided among the French groups Tereos (6.3%) and Sucden (1.7%), as well as China’s Kuok (4.1%). The remaining 29.5% have been diluted in the stock market. 91% of these shares belong to foreigners, while 9% are in Brazilian hands.

The recent increase in foreign participation is considered significant, since the sector is pulverized and has 320 sugar and ethanol refineries, according to Júlio Maria Martins Borges, president of Job Economia e Planejamento (“Job Economics and Planning”).

The wave of mergers and acquisitions in the sector began picking up momentum after 2000. A survey carried out by KPMG shows that there have been 37 deals involving mergers and acquisitions between 2000 and 2005. The data do not take into account the sale of Acucareira Corona and of the Mundial refinery, sold by Cosan in 2005.

Over the last five years, investments in mergers and acquisitions have been estimated, at present value, at US$ 3 billion. US$ 1 billion from this amount involve foreign corporations. Mr. Borges, in a conservative estimate, believes that foreign groups will double their share over the next five years.

Foreign capital started flowing into the country in 2000. The first groups to arrive were Louis Dreyfus, which controls Coinbra, in 2000, when it acquired the Cresciumal refinery, in Leme, Sao Paulo state, and Tereos (formerly known as Beghin-Say), in 2001, when it purchased Guarani Sugar, which has two plants in the interior of Sao Paulo state. Louis Dreyfus has been plowing ahead with its expansion plans and today has three refineries. The Tereos group recently announced US$100 million in investments for its third refinery in the country.

Mr. Borges believes that European groups have turned their attention to Brazil because of reforms that were carried out in the sugar and ethanol markets and because of the country’s low production costs.

Foreign investments are expected to continue to flow into Brazil. Market analysts consider it a sure thing that Cargill and Bunge, two giants in the grains business, will begin producing sugar and ethanol in the country. Last year, Cargill announced that it was negotiating the purchase of Acucareira Corona, which has two plants in the country. But the negotiations fell through and the company was sold, instead, to the Cosan group. The world’s largest sugar producer, Sudzucker, is also interested in purchasing refineries in Brazil.