M&A
Brazil's Sugar High
December 2011 | Vander Giordano, São Paulo
A dramatic transformation is under way in Brazil's sugar and ethanol industry, as foreign capital fuels a wave of consolidation and family-owned businesses rush to
sell to the highest bidder. Newcomers must be aware of -- and protect themselves against -- fraud.
The Brazilian sugar and ethanol industry has become an important option for investors seeking to increase their holdings in the energy sector. Several factors, notably the country’s large sugarcane production, the instability of global oil prices, and growing worldwide concern over the environmental impact of energy production, have combined to make the sector particularly attractive. Brazilian government support adds to this appeal. The National Economic Development Bank (BNDES) has approved some $35 billion in loans to private companies in the sector over the next four years. These will support the growth of sugarcane plantations, spur technological development in the industry, and finance the expansion of ethanol distilleries, pipelines, and other transportation networks for the industry.
It is not surprising that an increased participation of foreign capital has accelerated consolidation within the sector in recent years. The transformation has been dramatic. What was once an industry of primarily family-owned businesses is now dominated by professionally run companies. This trend is expected to continue as large firms increase their market share and the number of small enterprises further diminishes.
This transformation brings a variety of challenges, including a culture shock for Brazilians as the archetypical powerful local business owner – a staple of the country’s literature and political imagery – is slowly being replaced by faceless executives. International investors face other issues as well. Kroll has seen a high incidence of unethical behavior in the pre-sale phase of transactions, especially in the cases of heavily indebted sellers. These practices, including fraud and other questionable behavior by employees and suppliers may continue even after the arrival of new owners.
Once the acquisition is complete, those buying a Brazilian sugar and ethanol producer would be well advised to undertake a comprehensive internal review, with special attention to budget execution, late payment of vendors, expenses for supplies, contract enforcement and outstanding debts. Particular attention should be paid to activities involving industrial and agricultural warehousing; cutting, loading and transportation of sugar cane; delivery of farm supplies; provision of contracted services; and company fuel supplies. The most important step of all is to implement a new system of internal controls.
The following may help to minimize risks in the period after the purchase is completed:
1. A good way to start the process of transforming internal procedures is to set up an effective channel for internal communication to funnel the ideas, suggestions, and complaints of employees that impending changes inevitably create. It is important to give this channel credibility by providing prompt and full responses to employees’ concerns. The change of personnel in key positions at this early stage will help ensure that the company’s answers are clear and objective. The human resources department will play a central role in this process.
2. The next step is a complete review of all major agricultural and industrial processes with particular emphasis on the role of each employee. A thorough review and crosscheck – using a company’s Enterprise Resource Planning systems – of purchase orders, payrolls and work hours, and price curves of key inputs will provide a detailed picture of the plant’s operations and the reliability of the numbers in its financial statements and other reports. The directors of the agriculture and industrial divisions will have a key role in assuring the success of this review.
3. It is recommended that the internal transformation process be accompanied by a renewed commitment to security. In the first year of the new ownership, it is crucial to undertake a thorough assessment of the corporate security structure and technical staff, followed by the implementation of state-of-the-art security systems to ensure the highest level of asset protection at the plants.
4. To raise awareness of new business practices, management may want to conduct an internal campaign by distributing manuals, explaining ethical conduct and encouraging employee engagement based on a clearly defined set of goals set by the new owners.
5. To reinforce best practices, training modules, aimed at group leaders, help reinforce the new rules of conduct and the need for commitment from all employees to the implementation of new practices. The human resources department would be responsible for coordinating this phase of the program.
The above efforts will be necessary to help effect an ideal transformation in the newly purchased company. The participation of top management and its willingness to follow through in implementing these five steps will go a long way towards bolstering the understanding of – and the support for – any new processes that the incoming administration needs to impose. If this does not happen, however, the possible losses during the transition could potentially undermine the entire investment.
The Author: Vander Giordano ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ), a managing director in Kroll’s São Paulo office, is a member of the Brazilian and International Bar Associations.
This article originally appeared in Kroll's 5th annual Global Fraud Report released in October 2011. Click here to download a copy .