Raízen’s IPO draws British asset manager Baillie Gifford back to Brazil

RIO DE JANEIRO, BRAZIL – Despite recent tensions and concerns in the market, not everything is gloom and doom. Some see an interesting future for Brazil, even if in isolated opportunities.

One of them is the IPO by Raízen, the ethanol producer and fuel distributor jointly controlled by Cosan and Shell – it drew back to Brazil an investor long unseen in initial public offerings (IPOs) in the country: British firm Baillie Gifford.

A long-term fundamentalist and activist, the British asset manager is Mercado Libre’s second largest individual shareholder, valued at over US$88 billion, with approximately 9.5% of its capital, second only to Capital.

Its participation in the Raízen operation was not merely illustrative: it bought over 10% of the entire public offering, totaling R$6.9 (US$1.3) billion. The check signed was the largest by a single investor, about US$150 million, or over R$750 million. The list of illustrious investors also included Dutch manager Robeco and American Wellington and BlackRock.

Raízen debuted on B3 valued at approximately R$70 billion, with its shares purchased at the floor of the suggested price range, i.e. R$7.40. On Friday, August 20, the stock completed a little over two weeks of listing and has accumulated a drop of 6.5% compared to the launch value, quoted at R$6.90.

The company targeted a R$100 billion valuation, keeping an eye on Finnish Neste’s multiples, with which it compared itself in the presentation to international investors. Listed on the Helsinki stock exchange, the company is valued at €42 billion and is one of the “carbon free” world’s darlings. With net revenues of almost €12 billion last year and EBITDA of €1.5 billion, it produces 3 billion liters of green diesel. It is therefore traded at well over 20 times EBITDA.

Raízen has reinforced that it is capable of expanding production by over 3 billion liters (2 billion in second generation ethanol plus the equivalent of 1 billion liters in biogas), or an entire Neste, without the need for any additional land. So it went to B3 in search of capital and financial independence from its controllers, Cosan and Shell.

It is not that there is lack of resources with these partners – as a matter of fact, Shell did not want to split the asset, so much so that it demanded a listing on Level 2 and refused Novo Mercado. But the company’s freedom for its projects is undeniably much greater henceforth.

This additional production is added to the current capacity of 2.5 billion liters in last year’s crop. Without these extras, in the crop year ending in March, the company’s EBITDA stood at R$6.6 billion. A multiple of 20 times applied here would take the business to over R$115 billion – without a productivity increase and without Biosev, just over 2021.

Raízen prevents 5.2 million tons of carbon emissions per year – more than the 3.7 million tons that Tesla has prevented in 11 years. Moreover, it is equivalent to 2.5 million fewer cars on the road. Speaking of electric cars, Bosch, Volkswagen, and Nissan are betting big that electric cars will be powered by fuel-cell from ethanol. And the research is, of course, in Brazil. Not by chance that the reference commodity for this IPO was not ethanol, but carbon.

Having a partner of Baillie Gifford’s stature and profile fits perfectly with Raízen’s challenges. “Our investment process is based on long-term ownership and supporting growing companies. We want to help companies expand their potential by encouraging them to invest in expansion opportunities and ignore short-term pressures,” the firm says in one of the documents describing its mission.

“Successful active investment management isn’t easy: it requires dedication, independent thinking, and a long-term perspective,” the management company adds. Anyone familiar with Raízen says that the company’s attractiveness is also its greatest challenge. It is an unparalleled asset in the world. Although it is part of two publicly traded conglomerates – Cosan and Shell – its potential was still unknown until the IPO. And it had not been publicly explored before.

In addition, the most valuable plan, the exploitation of second-generation ethanol, is virtually all in the future. So just as this prosperity is additional, it is also an execution risk. And particularly in Brazil, it has suffered investor scrutiny for its intended valuation premium.