Cosan explains monetary operation behind the acquisition of Vale
- October 11, 2022
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Cosan’s share dropped nearly 9% on Friday after the announcement of the purchase of a 6.5% stake in Vale.
After the market closed, the company held a conference call with investors – and is publishing more details about the financing of the operation this Monday.
The Brazil Journal spoke on Sunday with Marcelo Martins, the chief strategy officer from Cosan.
Marcelo, who has worked at Rubens Ometto’s holding for 15 years, is the same executive who created the acquisition of Esso (in 2008), the JV with Shell and the creation of Raízen (2011), the purchase of Comgás (2012), the acquisition of ALL in 2015 (giving rise to Rumo) – in addition to the corporate reorganization that simplified Cosan’s structure two years ago.
Marcelo said that the investment in Vale is another step by Cosan in building a portfolio of natural resources businesses. “What has changed this time is the way we structured the acquisition, and the fact that we won’t have control of the business, even though we can help a lot.”
Below are excerpts from the conversation.
Cosan’s share dropped sharply on Friday after news of the purchase of its stake in Vale came out. Why did the market not like the move?
I think the market didn’t have time to understand the movement, because we had never really used a structure like this. All of our previous M&As have been on the classic model – with absolute control and no derivatives. But the beauty of this transaction is just that. Vale’s shares are very liquid, and this structure gives us protection if the share falls below a certain price, although it also limits our gain beyond a certain level. In addition, it allows us to have an optionality: exit the position at any time – if the investment does not go as we imagined – and capture a lot of value if things go in the direction we expect.
Most – if not all – of Cosan’s businesses have very recurring cash generation. In this sense, Vale is different, because its business is more cyclical than, for example, the distribution of gas or fuel. Why are you getting into a volatile business?
Vale is a commodities company, and this cyclicality does exist – but it is also a large cash generator, with little leverage, and should continue to pay a good dividend, even more so considering its great capacity to attract capital in specific businesses that may require greater investment.
The ore produced by Vale is of the highest quality, and will be fundamental in the global energy transition. In addition, the market also does not adequately price the company’s base metals business.
We believe that we have a lot to contribute to changing this scenario, both with our track record in other businesses, as well as in supporting the team of top managers that Vale has. We believe that an aligned governance focused on relevant strategic decisions will be very beneficial for the company.
You talk a lot about the optionality that this transaction creates. How does the financial transaction work in practice?
We bought 1.5% of the company at that time. The funds for this spot position came from a financing with Itaú and Bradesco that will be repaid by a structure of redeemable preferred shares – that is, Cosan will take a piece of the dividend it receives from Compass and Raízen – only from these two companies – to amortize over time. The structure that the banks gave us is linked to the percentage of dividends, not a specific term. In other words, these preferred shares can be redeemed in 10 years, or even longer. We are going to lose this part of the dividends, but on the other hand, we will gain the dividend from Vale.
The remaining 5% are part of a derivatives structure that will allow us to buy more shares or quickly dismantle them. The thing works like this. Cosan will not have to make any disbursements until the end of 2024, when the first 15% of derivatives will expire – that is, it is only then, two years from now, that we will have to decide whether or not to convert them into shares. Therefore, it makes no sense to talk about selling assets in our portfolio to finance this position.
And the second disbursement will only happen at the end of 2025. From now until then – two or three years – is enough time for us to test our thesis and see if it really creates the value that we imagine it is creating with this investment.
Are Cosan’s dividends likely to be lower in coming years as the company intends to use dividends from its operating companies to redeem preferred shares with banks? And is this lost dividend flow offset by the dividends that Vale pays?
Our expected cash generation – plus the dividends paid by Vale – should be sufficient to honor almost all disbursements of this and other Cosan obligations, as well as the payment of dividends to our shareholders. If we have to take on any debt, it will be very small and only up front.
On Friday, Raízen and Rumo suffered along with Cosan’s action. Can you decide to sell the control of these companies to finance the position in Vale?
No way. Raízen and Rumo, as well as the other companies we control, are strategic businesses for Cosan. We have no interest – let alone need – to sell these companies. We made that clear to our investors on Friday’s conference call. Our priority is and will continue to be the investment plan foreseen in the companies of the group.
In the future, we can consider the sale of some assets that we do not consider strategic, such as the terminal that was recently announced by Rumo. We are portfolio managers; we have to have the discipline to review and dispose of assets that no longer bring the level of return desired by the company.
Source: Brazil Journal