US commodities trader Bunge Ltd and British energy company BP Plc said on Monday they will merge their Brazilian sugar and ethanol operations to create the world’s third largest sugarcane processor.
The joint venture is the largest deal in Brazil’s bioenergy sector since Royal Dutch Shell joined forces with Cosan to form industry leader Raízen in 2011.
The deal gives BP a role in Brazil’s booming ethanol market ahead of a new federal policy next year aimed at boosting use of biofuels, which are used interchangeably with gasoline in Brazilian passenger cars.
“Brazil is the Saudi Arabia of biofuel,” said BP’s head of alternative energy, Dev Sanyal. He added that the new venture was cash-flow positive.
Bunge said it will receive cash proceeds of US$775 million as part of the agreement, which it expects to use to cut debt. But the company said in a US filing that it is planning a third-quarter impairment charge “in the range of US$1.5 billion to US$1.7 billion” related to the “cumulative currency translation effects” of its business in Brazil.
The US-based company has tried to sell its sugar operation in Brazil in the past with no success. It then tried listing shares of the unit in Sao Paulo last year, but cancelled the plan, citing adverse market conditions.
Bunge sold its sugar trading business to Wilmar International Ltd last year. Its bioenergy unit posted losses in five of the past six quarters and the company forecast results for the unit would be roughly break-even in 2019. “This partnership with BP represents a major portfolio optimisation milestone for Bunge which allows us to reduce our current exposure to sugar milling,” Bunge CEO Gregory Heckman said in a statement.
Market conditions have improved for ethanol in Brazil, with strong demand and better prices, but the global sugar market remains challenging.
“I think the companies together will be able to have large synergies, there will be great optimisation of resources and cost reductions,” said Arnaldo Corrêa, a sugar and ethanol consultant in Brazil.
“It is great news for the sector, because the deal creates a much stronger player. All those worries about the future of Bunge’s assets disappeared,” he added.
The joint venture, named BP Bunge Bioenergia, will operate on a standalone basis, headquartered in Sao Paulo. Besides sugar and ethanol, the company has capacity to produce electricity fuelled by waste biomass from sugarcane.
“The new company will certainly focus on fuel and electricity, which will have a growing importance as Brazil’s economy recovers,” said Plinio Nastari, chief analyst at Brazilian consultancy Datagro.
“Brazil has a deficit of fuel production,” said Mario Lindenhayn, head of biofuels at BP and future chairman of the new JV, adding that the company has its eye on new Asian ethanol markets.
The deal, expected to close in the fourth quarter of 2019, includes exit rights after 18 months. Bunge has an option to launch a share offering after two years.
“We have a strong, committed partner in BP, as well as flexibility in the medium and long term for further monetisation, with full exit potential via an IPO or other strategic route,” said Bunge’s Mr Heckman.