When two titans who have been slugging it out in court decide to drop their dispute and merge with each other instead, it's time to stand up and take notice. That's what happened on May 14 when Cosan Limited (NYSE:CZZ) announced that Rumo, its logistics subsidiary, and America Latina Logistica, or ALL, had officially ended their ongoing litigation.
The market may have been expecting this since February. That's when Cosan proposed a merger between Rumo and ALL, the latest in a line of empire-building moves by Cosan's chairman, Rubens Ometto.
A long-sought deal
According to a Reuters report, Cosan has long relied on ALL, one of Latin America's largest railway operators, to transport its sugar to port facilities. Mr. Ometto tried to buy a controlling stake in ALL back in August but was unsuccessful. The legal dispute between Cosan's Rumo and ALL began when ALL stopped railway service for Rumo's sugar, claiming that Rumo had ceased payments on the shipping contract.
But the proposed merger should put an end to all of that. Cosan CEO Marcos Lutz expects ALL to approve the $4.7 billion deal, according to Reuters. The planned takeover would form Latin America's largest railway and logistics company. "Rumo is a cash generator, so the resulting company will have good cash flow," Mr. Lutz said in a call with investors. "ALL is a unique asset. Rail is the most efficient, in terms of costs, to transport in an area where there are no waterways," he went on to say.
Another company that stands to benefit by the merger is Royal Dutch Shell (NYSE:RDS.A), which has a stake in two of Cosan's subsidiaries. Shell controls 18.1% of Comgas, Cosan's natural gas distribution company, and owns 50% of Raizen, Cosan's energy subsidiary. Raizen has a dealer network of 4,900 Shell-branded stations and produces sugar, ethanol, and electricity from sugar cane biomass.
All the right moves
A Financial Times report quoted Rubens Ometto as saying of the merger, "If you analyze this new company, it will handle [the freight of] about 60 to 65 per cent of Brazilian agro-business, so you can imagine the importance it will have not only for farmers but also for Brazil."
The report describes how Mr. Ometto turned a family-owned sugar mill into the world's largest sugar and ethanol processor over a period of three decades. It was in 2010 that he teamed up with Shell to set up Raizen, valued then at $12 billion. Comgas, also partially owned by Shell, came later, in 2012, when Mr. Ometto purchased a controlling stake for $1.8 billion.
Today, Cosan consists of several business units. This slide shows how the company has increasingly diversified its capital investments over the years.
According to company sources, Comgas is the largest distributor of natural gas in Brazil, with more than 9,000 kilometers of pipelines. Raizen handles the dealer network of Shell stations and annually produces 4.5 million tons of sugar, 2.2 billion liters of ethanol, and electric power from biomass. Cosan Lubricants has plants in Brazil and the United Kingdom, while the company's Radar subsidiary is involved in analyzing and managing land investments. Finally, there's Rumo, the subsidiary slated to merge with ALL. Rumo is the logistics arm of Cosan and operates two port terminals for sugar and other solid bulk products.
Should Fools rush in?
The Rumo merger with ALL isn't a done deal just yet. According to Cosan's announcement regarding the suspension of litigation, the companies are now working to obtain the approval of the Brazilian Antitrust Board, or CADE, and the National Transportation Agency, or ANTT.
Cosan will be updating the market on the progress of the merger negotiations, so keep an eye out for news from that front. But remember that this deal is just the latest in a string of strategic moves by Rubens Ometto to grow the company. The cash flow and debt pictures look fine, and Cosan has enjoyed a 65% compound annual growth rate in EBITDA from 2008 to 2013.
More aggressive investors may feel comfortable building a position based on the company's existing fundamentals, letting the merger deal simply be icing on the cake. Based on the stock's rise since the announcement of the deal, that may be just what some are doing.