Cosan Wraps up Esso Purchase

Brazilian ethanol producer Cosan has concluded its $890m purchase of Exxon Mobil’s Brazilian distribution assets, known as Esso. The deal includes $715m for all of the shares of the unit plus $175m in assumed debt. The transaction propels Cosan into a new category of corporate – changing it from a large sugar and ethanol producer into an integrated fuel company with the fourth largest distribution network in Brazil. Cosan had a $500m standby line of credit for the deal with Bradesco, according to a JPMorgan report issued yesterday, which in announces the shop’s initiation of coverage of Cosan shares. With an additional $400m capital injection from its parent company, the deal was set to be concluded without any major hitches, says the report. “Even accounting for Esso payments, the company should be in a relatively comfortable leverage position. It benefits from having very [long term] debt maturity, including $450m in perpetual bonds with an 8.25% coupon rate.” Still, the company’s high leverage of around 10x trailing 12-month Ebitda should prevent the it from being an aggressive large-scale acquirer in the near term, says the shop. “Although Cosan no longer has restrictive covenants on its leverage ratios, a [net debt to Ebitda] of 3.8x-4.0x is high enough to limit significant further spending on M&A until this leverage is brought down,” according to JPM analysts.