Brazil’s Sao Martinho Ready for Deals as Sugar Slumps

As sugar prices plummet, Sao Martinho SA is ready to consider takeovers of struggling Brazilian producers after the country’s top miller by market value cut debt ratios to the lowest among peers.

The sugar and ethanol maker will look into buying neighboring mills that can help it reduce costs and increase productivity at existing units, Chief Executive Officer Fabio Venturelli said in an interview at the company’s headquarters in Sao Paulo. There is a large number of mills near Sao Martinho’s units that would provide that kind of advantage if they were to go on sale, he said.

“Sao Martinho will suffer less when everybody else is suffering because of our operational management,” said Venturelli, 48, a former global business director at Dow Chemical Co. before becoming CEO of Sao Martinho in 2007. “The industry will have to go through big consolidation to regain its balance.”

Investors from billionaire George Soros to Bunge Ltd. bought stakes in Brazilian sugar mills in past years, helping send crops to record high levels and push down prices more than 50 percent from an early 2011 record. While the investment spree in the largest producing country led several local mills to boost borrowing to keep their share of the market, Sao Martinho managed to increase output and keep indebtedness as a proportion of earnings in check.

‘Comfortable Leverage’

“Sao Martinho is a reference of operational efficiency,” Banco Fator equity analyst Alessandra Moratti said by telephone from Sao Paulo. It has “comfortable leverage levels.”

The miller is the least leveraged of five listed emerging-market peers with a market value above $200 million and sales above $100 million, according to data compiled by Bloomberg. It reported a net debt ratio of 1.99 times earnings before interest, taxes, depreciation and amortization for the 12 months through September. Cosan SA Industria & Comercio and Royal Dutch Shell Plc’s Raizen joint venture, the world’s largest sugar-cane processor, isn’t a public company.

The company intends to increase annual sugar-cane processing capacity under its management by 76 percent to 30 million metric tons by 2020 from 17 million now, including units that are not fully owned by Sao Martinho. That will have to be achieved mainly through mergers and acquisitions because the company doesn’t have much more room to grow organically, Investor Relations Director Felipe Vicchiato said in an e-mailed response to questions.

M&A Consolidation

The sugar maker, which grows about 70 percent of the cane it processes, almost doubled capacity from 9 million tons in 2007 after spending 1 billion reais ($432 million) in the past four years to expand two mills, build a joint venture with state-run oil producer Petroleo Brasileiro SA and buy assets. Its latest acquisition was the 200 million-real purchase of sugar-cane crops and a warehouse from Louis Dreyfus Holding BV’s Biosev SA last year.

Sao Martinho’s focus has been to consolidate acquisitions made in past years and reduce costs, Venturelli said. Net debt rose to 1.51 billion reais at the end of September from 338.8 million six years earlier. In the same span, quarterly sales more than doubled to 504.3 million reais from 179.1 million.

Earnings before interest and taxes could reach 550 million reais to 600 million reais in coming years after investments in milling capacity and sugarcane supply, he said. That compares with 202 million reais in the fiscal year ended in March 31, according to data compiled by Bloomberg.

Stock Performance

Sao Martinho’s shares have risen 3.5 percent this year before today, compared with a 33 percent slump for Biosev and a 14 percent decline for Tereos Internacional SA. The shares fell 0.4 percent from yesterday to 28.85 reais at 2:15 p.m. in Sao Paulo.

The company’s focus on containing debt levels may inhibit sizable acquisitions any time soon, said Plinio Nastari, head of sugar research firm Datagro.

“Sao Martinho has capital, has been getting stronger, but I don’t see it making a big move,” Nastari said in an interview at his office in Sao Paulo. “Its philosophy is to grow in a safe manner.”

The high indebtedness of smaller mills probably will make acquisition opportunities scarce, Fator’s Moratti said.

Nastari expects Asian buyers to lead acquisitions of Brazilian mills in coming years to ensure supplies of sugar to the region’s growing middle class, such as the purchase of 50 percent in Cia. Mineira de Acucar & Alcool Participacoes by Indofood Agri Resources Ltd. in January.

Debt Costs

Sao Martinho is paying about 4 percent in dollar terms for export finance loans and 6 percent on local-currency debt, Sao Martinho’s Vicchiato said.

By comparison, yields on sugar and ethanol maker Virgolino de Oliveira’s $300 million of bonds maturing in 2018 have jumped to 20.6 percent from about 10.3 percent when they were sold in early 2011, according to data compiled by Bloomberg.

Virgolino didn’t return e-mails and calls seeking comment on the surge in its borrowing costs.

“With new players, the old ones sought to grow too and some wound up in a financial crisis and were replaced by new owners,” Venturelli said, declining to name any possible acquisition target. “Next year, more millers will start recognizing they will have to sell.”

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