Analysis: Raízen’s US$19 billion IPO offers a precursor of a “carbon free” world

RIO DE JANEIRO, BRAZIL – Energy giant Raízen, a partnership between Cosan and Shell, will launch its largest initial public offering (IPO) in 2021. The move is symbolic beyond the figure. It is the listing of a unique asset in the world.

The operation is expected to take place in July. It will also represent the debut at B3 stock exchange of one of Brazil’s 5 biggest companies in terms of revenue, with its almost R$115 billion recorded in the year ended last March.

The company will seek a valuation between R$90 billion and R$100 billion – or up to US$20 billion at the current exchange rate. And according to investors who have attended initial meetings with the company, controllers were expecting the business to be valued between R$140 billion and R$150 billion, with ongoing expansions scheduled for 2022.

However, in practice, it seems that the market is willing to pay between R$70 billion and R$90 billion. With so many external and unpredictable factors that can interfere in an IPO, the price will only be known once the company launches the offering and negotiates with investors.

In the range between R$70 billion and R$100 billion, the fundraising – which will be exclusively for the company’s cash and investments – may range between R$10 billion and R$13 billion. Controlling shareholders – notably Shell, which had no interest in listing the company and preferred not to split the business – are not prone to large share dilutions unless they deem the amount to be appropriate.

This is also why Raízen will not be a Novo Mercado (New Market listing segment of B3) company, as it will have a structure made up of common and preferred shares. The understanding was that Shell would not accept any other partner with common shares. However, for Raízen, it will still represent the accomplishment of freedom to have its own financing sources, without depending on controlling shareholders.

Currently, within Cosan, now listed on B3, the market is paying something like R$50 billion to R$55 billion for Raízen, according to analysts’ estimates. Therefore, there is much hidden value to be disclosed in this operation, when placing the company’s project within the current global context.

Raízen’s listing could do for Brazilian ethanol what no government has ever done so far, and expose how sugarcane can indeed compete as an international energy matrix, in a world that will be under increasing pressure to reduce carbon emissions.

What Raízen saves in carbon emissions per year – 5.2 million tons – is more than the 3.7 million tons that Tesla has averted in 11 years. Moreover, it is the equivalent of 2.5 million fewer cars on the road. Speaking of electric cars, Bosch, Volkswagen, and Nissan are betting big that electric cars will be powered by fuel-cells from ethanol. The research is, naturally, in Brazil.

Brazilian investors, who often see entrepreneurs from the sugar and ethanol sector as mill owners, may look at the asset and consider the valuation too high, particularly taking into account the value currently assigned to the business within Cosan.

But thinking about the commodity ethanol, this time, may be a mistake. “This IPO’s commodity is something else, it is carbon,” says an analyst from a major bank who has been following the company for years. Ethanol’s carbon footprint is 80% smaller than gasoline and less than half that of corn ethanol. And considering second-generation ethanol, made from sugarcane cellulose, the footprint is 30% more efficient than regular ethanol.

After the acquisition of Biosev, in February, the Cosan group company currently controls 15% of Brazil’s sugarcane production. In addition to being the largest in the country, it is also the largest in the world.

To top it all off, Raízen is about to make second-generation ethanol a truly scalable product. This future is the shining star of this operation. Second generation, known by the acronym E2G, is nothing more than extracting more ethanol from what is now waste cane, including its leaves. This process, which is based on cellulose, involves the use of enzymes – a technology that is different from that employed in regular ethanol.

For all its capacity, those closest to the industry use a definition to translate what cane is: solar energy in the form of biomass. Sugarcane supplies energy from food, with sucrose, to ethanol and biogas. It therefore fuels people, cars, engines, and is even in the green plastic chain, as a raw material for green polyethylene.

The best part? It can be stocked, transported and exported, because it physically exists. Raízen currently exports 90% of its ethanol production and has long-term, fixed-price contracts. Hence, it rejects the pure and simple perception of a cyclical business. Just like no other, it still has a level of integration with its own trading and distribution that no one else has.

Those who know the business well say that Raízen’s beauty is, at the same time, its greatest challenge. It is a unique asset in the world. Although part of two publicly traded conglomerates – Cosan and Shell – its potential is still unknown, and it has not been publicly explored before.

Would Brazil be a Finland?

As a “carbon-free,” or very low impact IPO, Raízen is focusing its placement efforts outside Brazil. The most comparable company – in part of the business – is Finnish Neste, valued at €42 billion on the Helsinki stock exchange, one of the “carbon free” favorites. The company, whose net income was close to €12 billion last year and EBITDA of €1.5 billion, produces 3 billion liters of green diesel. It is therefore trading at well over 20 times EBITDA.

Raízen has reinforced that it is able, without the need for any additional hectares, to expand production by over 3 billion liters (2 billion in second generation ethanol plus the equivalent of 1 billion liters in biogas), or an entire Neste. This additional amount is added to its current production, which last year totaled 2.5 billion liters.

Without these extras, in the crop year ending in March, the company’s EBITDA was R$6.6 billion. A multiple of 20 times applied here would take the business value to over R$115 billion – with no increase in productivity and without Biosev, only over 2021.

Considering the additional potential to be developed with E2G, plus Biosev (1 billion liters per year), which was acquired earlier this year, the group’s total capacity will reach 6.5 billion liters of ethanol per year – without land expansion. This is how the company has presented its potential to investors.

But for this to become a reality, second-generation ethanol needs to be commercially viable. Since current production is still very low, investors are gambling with the other side of this coin: the risk that it might not go according to plan.

It is now R$100 billion

When it bought Biosev, Raízen agreed that the payment would consist of R$3.6 billion in cash plus a 3.5% stake in the company (even before the IPO). According to some experts, this means that Dreyfuss has valued the company at at least R$100 billion, as the debt linked to the asset amounted to R$7.8 billion.

Thus, considering that R$ 3.6 billion were received in cash and the remainder was renegotiated with banks with Raízen shares as collateral, it is as if the Brazilian company had already reached the intended pricing even before it was listed on the stock exchange – at least with Dreyfuss and its creditors.

Shell

Although the big star of the IPO narrative is sugarcane, it should be noted that Shell’s entire fuel distribution business in Brazil is still part of the deal. There are 7,300 service stations, plus the whole logistics structure in Brazil and Latin America. Service stations alone, plus the Select units (1,300 in total), lead the company to a direct relationship with at least 50 million consumers per year and about 80,000 companies.

In the age of retail and end consumer, this is a hidden gold mine. The Shell Box app is currently used by 800,000 people.

Competition with food?

In the latest report, the International Energy Agency (IEA) surprised by declaring that the time has come for the world to stop using fossil fuels. It is as if the agency created for oil has decreed that the commodity’s usefulness to the world has expired, given its polluting potential.

In its report, IEA devotes nearly the entire text to the beauties of renewable electric energy. But when it comes to biofuels, while recognizing the advantages, it sees problems. The main one? It believes that energy supply cannot compete with food supply on the planet.

When investors ask Raízen about this, the company is quick to answer. “They are not comparable.” According to the company’s perspective – and that of other specialists who also understand the subject – there is no way to compare biofuel made from soy, canola, and corn with ethanol.

While one hectare of land produces 3 tons of biomass from soy or canola and 20 tons from corn, with sugarcane this total can reach 90 tons, excluding the productivity gains already on the industry’s radar.

Once investors understand the whole Raízen project, which only began to acquire the shape and dimension explored for the IPO after this year’s Cosan Day, they will have to do the math to understand the new world.

National fuel policies, or the prices charged by Petrobras, are no longer on the agenda, but rather the premium the world is willing to pay to reduce carbon emissions. This is the most significant economic rationale for the value of the company. It is this premium that will ultimately sustain the viability of Raízen’s gold, E2G.

Source: Exame