Cosan Offers to Buy Brazilian Railway ALL for $3 Billion

Cosan SA Industria & Comercio, which operates the world’s biggest sugar-cane processor, offered to buy railroad operator ALL-America Latina Logistica SA for 6.96 billion reais ($3 billion) in an all-stock deal. ALL rallied.

Cosan is proposing that its Rumo logistics unit swap shares with ALL in a transaction that values each ALL share at 10.184 reais, a 56 percent premium over the Feb. 21 closing price, according to regulatory filings today. Rumo, which is closely held, is valued at 4 billion reais in the offer.

Cosan, which has an ethanol production and fuel distribution joint venture with Royal Dutch Shell Plc, is seeking to streamline the transportation of its sugar to ports as Brazil produces record crops. This marks the Sao Paulo-based company’s second attempt to gain control of ALL.

“We see huge value in the combination of assets,” Cosan Chief Executive Officer Marcos Lutz told investors on a conference call. “We measured huge synergies between the entities.”

ALL jumped as much as 17 percent to 7.66 reais today in Sao Paulo trading before closing at 7.10 reais and bringing its total gain since Feb. 13 to 31 percent. Cosan rose 3.5 percent to 36.60 reais.

Gains of scale and cost reduction resulting from synergies will add as much as 450 million reais to the value of the new company, said Bruno Di Giacomo, an equity analyst at brokerage Fator Corretora in Sao Paulo.

“ALL stands to gain with the entrance of Cosan in the controlling group,” Di Giacomo said. “The market sees the entrance of strong shareholders as positive.”

Cosan’s Split

Under terms of today’s offer, Cosan will merge its Rumo unit with ALL and later split into an energy unit and a logistics company, both of which will be publicly traded. Cosan Ltd. will be the parent of both.

Shareholders of Rumo will hold a 36.5 percent stake in the new company and name most board members, while ALL’s shareholders will own 63.5 percent.

The offer needs to be approved by ALL’s board, which includes pension funds that had rejected Cosan’s previous attempt to buy a stake.

So far Cosan has support from two of six investors in ALL’s controlling group, Riccardo Arduini and family and Wilson de Lara. Representatives from the other four investors -- Brazil’s state-owned development bank, Previ, Funcef and BRZ Investimentos -- declined to comment on the offer. Three votes are enough to block the deal.

ALL’s press office said the company won’t make comments beyond what’s said in the statements.

Slow Expansion

The railroad company has failed to pick up the slack from jammed, pot-holed roads through which most of Brazil’s crops are still moved as some expansion plans are pending environmental approval and hinge on more port capacity. Cosan has accused ALL of not hauling its sugar fast enough, while ALL claimed its expansion is tied up to the expansion of ports and that it has made good on delivery contracts with Rumo.

In 2012, Cosan offered about $385 million for 5.67 percent of ALL to join its controlling group. The deal later fell through, prompting Cosan to demand better service from ALL through arbitration.

The end of the dispute will be another benefit of the deal, Di Giacomo said. Fator estimated ALL would have to pay as much as 500 million reais of penalty to Rumo.

Rail Network

ALL operates about 13,000 kilometers (8,000 miles) of rail lines, or almost half of the country’s 29,000 kilometers. Its network is crucial for Brazil’s booming farm industry as it connects the largest soybean producing state of Mato Grosso to Brazil’s two largest ports of Santos and Paranagua through Sao Paulo state, where most of global sugar exports are produced.

Cosan will discuss with lawyers ways to split its debt obligations into the two units, Chief Financial Officer Marcelo Eduardo Martins said today. While no decision has been made, it’s considering transferring bond obligations to Cosan Energia and Rumo’s debt obligation to Cosan Logistica, he said.

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