ALL-Cosan Deal Facing Antitrust Concern: Corporate Brazil

Cosan SA has an uphill climb to win regulatory approval of its $3 billion takeover of Brazilian train operator ALL America Latina Logistica SA.

The acquisition by Brazil’s largest sugar maker of the nation’s biggest railway raises questions about whether Cosan will prioritize sugar over other shipments such as soybeans, or charge rival producers higher fees, said Fernando Furlan, former president of the antitrust agency known as Cade. The regulator may block the deal or require the companies to sell assets or guarantee equal pricing, he and three other ex-directors said.

“There’s only one railroad -- one player can’t have priority and exclude others,” Cleveland Prates, former Cade director and antitrust secretary for the Finance Ministry, said in a phone interview from Sao Paulo. He’s now a partner at economic research firm Pezco Microanalysis. “Costs for other ALL clients may rise excessively, leading to an increase in prices for consumers in the end,” he said.

Cosan, the Sao Paulo-based company controlled by billionaire Rubens Ometto, last week won the blessing of ALL’s controlling shareholders including pension fund Previ to buy the train operator for about $3 billion in an all-stock deal. The proposal will be submitted to ALL minority shareholders within 30 days. The agreement is subject to approval by Cade and Brazil’s land transport regulator, known as ANTT.

Biggest Premium

The takeover proposal by Cosan unit Rumo values ALL shares at 10.184 reais, 22 percent above the closing price on April 17. It’s the biggest premium among deals worth at least $1 billion targeting emerging-market companies announced in the past 12 months, according to data compiled by Bloomberg.

That gap probably won’t narrow unless ALL and Cosan can convince investors that the combined companies will produce promised cost savings and other synergies, said Renato Hallgren, an analyst at Banco do Brasil SA.

“It will depend on how the company will be managed after the deal is concluded,” Hallgren, who rates ALL the equivalent of hold, said by phone from Sao Paulo. “Since the company will be owned by one of its clients, we’ll have to see if it’ll operate like a standard freight company or if it will work just as one of Cosan’s departments.”

Cargo Battle

The deal will culminate Ometto’s two-year battle to gain control over cargo routes that face regular bottlenecks as output of grains and other crops rise to records. In 2012, Cosan offered about $385 million for 5.67 percent of ALL to join its controlling group. The deal was rejected by ALL controlling shareholders in August, prompting Cosan to demand better service from Curitiba, Brazil-based ALL through arbitration.

“Cosan is a big user of railroad facilities, so of course there could be an abuse of power in this situation,” Arthur Barrionuevo, a former Cade member and a professor at university Fundacao Getulio Vargas, said in a phone interview from Sao Paulo. “Besides Cade’s actions, ANTT should also be more effective in the routine regulation of the activity to make sure prices allow competition.”

Cosan said planned investments will guarantee fair treatment to every ALL clients.

ALL shares are down 20 percent in the past year, compared with a 3.4 percent drop for the benchmark Ibovespa index. The rail operator has climbed 18 percent in the two months since the takeover bid was announced while Cosan shares are up 5 percent. ALL fell 2 percent to 8.21 reais at 1:57 p.m. in Sao Paulo.

ALL-Cosan Priority

“The priority of the new company will be grain cargo, which have further to go to get to ports,” Cosan’s press office said in an e-mailed statement. “With the investments we plan to make, other sectors that use the railroad will also have their demands met.”

ALL and Cade declined to comment.

Cosan points out that sugar produced by Raizen, its joint venture with Royal Dutch Shell Plc, accounted for only 0.5 percent of the 34.4 million tons of agricultural commodities shipped by ALL in 2013.

The Sao Paulo-based sugar producer also plans to set up a committee to evaluate contracts between ALL and Cosan to check for irregularities and conflicts of interest, Cosan Chief Executive Officer Marcos Lutz said in a February conference call. Cosan will name one of the five members on the committee.

Some soybean processors have already complained about a 2009 contract between ALL and Cosan that they say hindered shipments of their products, according to soybean and soy oil association Abiove. The group said in a February statement it submitted arguments to Cade as an interested party.

‘Deeply Concerned’

The soy industry group is “deeply concerned about the proposed merger between ALL and Cosan,” Abiove said in the statement. “The concentration of power in the hands of an important user of the railroad network may lead to business strategies that have a strong negative impact on the soybean sector’s competitiveness, jobs and Brazil’s trade balance.”

Abiove declined to comment further.

ALL customers sharing in these concerns may also seek to submit arguments to Cade, said Jose Matias-Pereira, another former antitrust member and a professor at the University of Brasilia.

“There are so many interests and opinions involved,” he said. “Cade will have to analyze every aspect carefully.”

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