Brazil mergers in ethanol and meat seen speeding up

By Roberto Samora

SAO PAULO, Feb 21 (Reuters) - Despite mounting costs, takeovers will accelerate in Brazil's biofuels and food industries, especially in the ethanol, sugar and meat sectors, as players seek to create bigger and more efficient units, consultants said.

In 2006 there were nine mergers and acquisitions in the booming sugar and ethanol sector, and there should be even more in 2007, according to KPMG consultancy's Brazilian unit, pointing out that the record number of deals was 11 in 2001.

Two of Brazil's largest sugar and ethanol producers, Cosan (CSAN3.SA) and Sao Martinho (SMTO3.SA), have led a trend by listing their shares on the Sao Paulo stock exchange, raising funds for further expansion. Others, such as Copersucar, Crystalsev and J. Pessoa Group are considering a similar move.

"Consolidation will accelerate as producers become better capitalized...the sector is still highly fragmented," said Andre Castello Branco, KPMG corporate finance partner, whose company is working on 10 M&A projects.

He noted that the 20 biggest sugar and ethanol producers accounted for less than 50 percent of Brazilian cane output.

However, a public share offering is an option open to only the half dozen largest producers, said Marcio Vieira , partner at PricewaterhouseCoopers in Brazil, adding that companies first had to improve financial management and transparency.

Complicated family ownership of many companies was another obstacle to takeovers.

In the meat sector, Brazil's biggest packer, Friboi, announced on Feb. 5 that it was seeking to list its shares on the Sao Paulo stock exchange in a move to finance further expansion.

"The cost of entry into the sector is relatively low because companies only have to buy and process the meat - they don't have to buy farmland (unlike sugar cane)," said Jose Carlos Hausknecht, director of MBAgro Consultoria.

Brazilian pork and poultry giants Sadia SDIA.SA and Perdigao PAGR3.SA are also expanding and raising capital.

Brazil's emergence as the world's biggest beef exporter in terms of volume and revenue has attracted foreign multinationals like Tyson Foods TSN.A, but they haven't yet succeeded in making investments.

Despite the obstacles, foreign investors are coming to Brazil.

"We're seeing a lot of foreign investors coming in either as partners or through investment funds," said MBAgro's Hausknecht.

European producers and trade houses have also been investing in Brazil as domestic sugar output falls due to cutting of subsidies.

Last week, the Brazilian unit of French commodities group Louis Dreyfus announced the purchase of four sugar and ethanol mills from the Tavares de Melo group.