UPDATE 2-Brazilian ethanol firms ETH, Brenco study merger

* Combined cane crush capacity could reach 37 mln T

* Talks with other possible partners will be "frozen" (Recasts, updates with executive comments, more details)

By Inae Riveras

SAO PAULO, Oct 8 (Reuters) - Brazilian ethanol and sugar groups ETH Bioenergia and Brenco said on Thursday they have signed an agreement to study a merger which could create one of Brazil's largest biofuel producers.

The projects combined, if executed as originally planned, would create a company with a capacity to crush 37 million tonnes of cane per year and produce 3 billion liters of ethanol by 2013/14.

"Both companies have modern, competitive assets which are headed for a future of clean and renewable energy," said Jose Carlos Grubisich, executive officer at ETH, the ethanol and sugar subsidiary of construction and petrochemical giant Odebrecht [ODBESO.UL].

Details of a potential transaction have not been defined, he said, but the companies would be forbidden from pursuing other tie-ups. He did not state the duration of the agreement.

The resulting company could go public after the consolidation between assets is concluded, Grubisich said.

"It makes a lot of sense to go public. We (ETH) had plans for 2012 but now if we gain more volume and become a leading company in ethanol and energy sooner, this could bring about a possible IPO," he told reporters at a conference call.

Mergers and acquisitions have gained momentum in Brazil's sugar and ethanol sector since the credit crisis toppled some highly leveraged mills.

ETH and Brenco have similar growth strategies based on low-cost production clusters. Each has several mills in cane frontier states.

The resulting company would also have capacity to generate 2,500 gigawatt hour/year of electricity burning cane bagasse.

AGGRESSIVE PLANS

ETH, which inaugurated its first greenfield mill in August, has two operating sugar and ethanol plants bought in 2007 and 2008. Another two plants which will come on-stream by the end of the month.

This season, it will crush between 7 million and 8 million tonnes of cane, still below its crushing capacity of 13 million tonnes. This could then be raised to 28 million tonnes by 2012.

Japanese trading house Sojitz Corp (2768.T) currently has a 33-percent stake in the company.

Brenco, an ethanol group backed by venture capitalist Vinod Khosla and AOL founder Steve Case, is currently building its first four biofuel plants in Brazil, each one with a crushing capacity of 3.8 million tonnes.

The first will come on line in November and the other ones in 2010. All of them will produce ethanol only.

Grubisich said that during the duration of the agreement, any talks with other possible partners will be "frozen". This includes Petrobras (PETR4.SA), Brazil's state-controlled oil company, which in August said it was negotiating with Brenco to explore possible opportunities in the biofuels industry.

Brenco, which has among its shareholders also Brazil's state development bank BNDES, said it has raised around 500 million reais since the beginning of the year, mostly from shareholders.

(Reporting by Inae Riveras; Editing by David Gregorio)