UPDATE 4-Brazil's ETH acquires Brenco, forms ethanol giant

* Deal creates one of world's biggest ethanol makers

* Brenco, a smaller ETH rival, weakened by credit crisis

* Companies' combined revenue about $2.2 bln a year

* State lender says tie-up will help the sector growth (Adds Brazil state lender supports deal, paragraphs 11-12)

By Roberto Samora

SAO PAULO, Feb 18 (Reuters) - Brazilian ethanol and sugar company ETH has agreed to take over smaller, debt-laden rival Brenco to create one of the world's largest ethanol producers, the latest in a series of large acquisitions in the sector.

The combined company, called ETH Bioenergia, should have annual output capacity of 3 billion liters of ethanol by 2012 and sales of about 4 billion reais ($2.2 billion) a year, the companies said on Thursday.

ETH shareholders, Brazilian construction and petrochemical giant Odebrecht [ODBESO.UL], and Japanese trading house Sojitz Corp (2768.T), will own 65 percent of ETH Bioenergia. Brenco's owners will control the rest.

The terms of the deal were not disclosed.

Brazil's sugar and ethanol industry has seen a flurry of mergers of acquisitions in recent months, luring investors as more countries mix the biofuel into gasoline and as more flex fuel cars take to the road in Brazil, running solely on ethanol. [ID:nN18150899]

Earlier this month, Royal Dutch Shell Plc (RDSa.L) announced the biggest-ever foray into biofuels by a major oil company, striking a deal with Brazilian sugar and ethanol giant Cosan (CSAN3.SA) to create a $21 billion-a-year joint venture. [ID:nLDE6110D9]

Many of the ethanol producers belonging to Brazil's centuries-old sugar sector were crippled by the recent credit crisis, which arrived shortly after many borrowed heavily to expand as ethanol's bright prospects became apparent.

Brenco, an ethanol group backed by venture capitalist Vinod Khosla and AOL founder Steve Case, was one of several companies that saw expansion plans thwarted by the impact of the recent crisis.

"Brenco will speed up ETH's plans to grow and for Brenco this is a good opportunity to finance operations," said Julio Maria Borges, director at Job Economia ethanol consultancy in Sao Paulo.

Brenco, which is building its first four ethanol plants, each with a cane crushing capacity of 3.8 million tonnes, missed a November target to inaugurate the first.

"All Brenco's units (being built) have top-notch technology, they all have good potential, so they were very good assets to be bought," Borges said.

EYEING IPO

Brazil's state development bank, BNDES, which has committed 30 billion reais in loans to sugar and ethanol firms, said the tie-up was an important step for the growth of cane ethanol and in conformity with the government's development policies.

President Luiz Inacio Lula da Silva's government has regularly supported the creation of national conglomerates in sectors in which Brazil is most competitive and able to take on bigger rivals abroad.

On top of the 3.8 billion reais ETH and Brenco have invested to date in their own firms, they plan to invest a further 3.5 billion reais from 2010-2012 to maximize capacity at their nine mills -- five owned by ETH and already running.

ETH had been aiming for a cane crush capacity of 28 million tonnes per year by 2012, but helped by the addition of Brenco's units, it should now reach 40 million tonnes by then.

Brazil, the world's largest ethanol exporter, typically harvests more than 600 million tonnes of cane a year.

The 40-million tonne capacity would catapult ETH Bioenergia to joint-second among Brazil's cane processors, together with LDC-SEV, a firm born from the takeover of local group Santelisa Vale by French giant Louis Dreyfus, in late 2009.

Cosan is the biggest in the sector, with capacity to crush around 60 million tonnes of cane.

ETH Bioenergia and Brenco had similar growth strategies based on low-cost production clusters in states newer to cane cultivation.

ETH Bioenergia will also produce between 550,000 and 600,000 tonnes of sugar a year from some of its plants.

"Despite the fact the focus will be on ethanol and energy made from biomass, we have some units that produce sugar, which will help improve the cash flow as we enjoy the good moments in the international sugar markets," said ETH Chief Executive Jose Carlos Grubisich, who took the job in 2008 after seven years running Braskem, Latin America's largest petrochemical group.

Under his command, Braskem (BRKM5.SA)(BAK.N) played a leading role in the consolidation of Brazil's petrochemical sector by spearheading the takeover of Ipiranga Group's petrochemical assets in March 2007.

ETH Bioenergia, which also intends to generate 2,700 gigawatt hours of electricity burning cane bagasse by 2012, plans to go public some time between the second half of 2011 and early 2012, Grubisich said.

The joining of the two firms was originally expected in late 2009 after the two parties in October signed an agreement to study a tie-up. ($1=1.823 reais) (Reporting by Roberto Samora, Writing by Inae Riveras and Peter Murphy, Editing by Todd Benson, John Wallace, Tim Dobbyn)