BP Plc. (BP) plans to acquire major interests in Brazilian ethanol and sugar producer Companhia Nacional de Acucar e Alcool, or CNAA, pending regulatory approval and other customary closing conditions. This would mark the largest deal to date by the British oil giant’s alternative energy unit.
BP intends to acquire 83% stake in CNAA for a total consideration of $680 million. The transaction value includes 100% of CNAA’s long-term debt, which is expected to be refinanced by BP, the value of which is still undisclosed. On the other hand, French commodities group, Louis Dreyfus will be taking the remaining 17% stake of CNAA.
Upon closure, the CNAA acquisition is expected to boost BP’s overall Brazilian output to approximately 1.4 billion liters of ethanol per year (9 million barrels), which is significantly up from the current production of 435 million liters. The oil giant will take hold of two operational ethanol plants in the states of Minas Gerais and Goias as well as a third CNAA plant, which is under development in Minas Gerais.
We believe this CNAA deal is a significant step for BP in support of the momentous growth platform in Brazil. Further, in the escalating crude oil prices environment amid political disturbances in the Middle East, we believe demand of biofuel is expected to increase manifold. Countries all over the world are emphasizing more on reducing carbon emissions.
In 2008, BP was the first company to enter the Brazil’s ethanol sector through its 50% acquisition of Tropical Bioenergia SA. The company’s major rival, Royal Dutch Shell’s (RDS.A) $12 billion deal with Cosan Industria e Comercio SA in February 2010 also affirmed oil majors’ increased focus on Brazilian biofuel production.
BP stressed that alternative fuel would emerge as the strongest in the energy sector in another 20 years, with global biofuels output increasing more than three fold.
We believe that the recent tie-up will bode well for BP, which is strengthening its foothold in growing energy markets, while reducing its dependence on the Gulf of Mexico.
We retain our long-term “Neutral” recommendation on the company. BP holds a Zacks #3 Rank (short-term ‘Hold’ rating).
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