The secrets of Rumo-ALL merger

Until the end of last year, it was only discord and distrust. Rumo, the logistics arm of Cosan group, controlled by businessman Rubens Ometto, lived in a stage of acute dispute with América Latina Logística (ALL), which operates the main parts of the Brazilian railroad network. To say dispute is way of putting it lightly. The two companies were entangled in a visceral dispute around a contract signed in 2009.

Suddenly, the wind shifted. In April, the board of ALL approved a merger process, through which it accepted, without delay and by a very large majority, to be incorporated into Cosan. Just like that? Not so much. The behind-the-scenes narrative of this negotiation shows that these two giants of the national economy were tied by the neck around the agreement, signed five years ago. Any false move from one company would smother the other. If the war was kept, there would be only losers – and billionaire losses.

That’s why the first character in this story is precisely the 2009 contract. (Executives of Cosan, involved in the negotiation, refer to the document as ill-fated.) The agreement, when it was designed, bundled an idea at the same time simple and profitable. It was a win-win type agreement. A piece of cake. Rumo undertook to inject $ 535,331,880.00 into ALL’s network. On the other hand, it gained the transport guarantee of its sugar through São Paulo state to the port in Santos.

ALL, therefore, would receive locomotives, cars, rails and sleepers. Rumo, in turn, would chase off its business the nightmare embedded in the chaotic flow of commodities in Brazil. It all looked beautiful. And it was. But everything went wrong. The contract became a tug of war between the companies. The fight went beyond the grapevine: it ended in a Chamber of arbitration in October 2013.

Cosan claimed they would invest the combined values. The works, however, were not carried out. They predicted the doubling of railroad line between Itirapina (SP) and Santos. ALL defended itself claiming that they had faced problems with obtaining environmental permits to complete the segment. Along the way, there was an Indigenous tribe. The mess was made. An Executive of the Ometto group went so far as to state that ALL was being sloppy to transport the sugar from Rumo to prioritize loads of grain from the Midwest, with longer routes and therefore more profitable.

A big team of “tractors”

It was in the middle of this shooting that Carlos Alberto Sicupira came onto the scene, Beto, as he is known on the market. Beto Sicupira told interlocutors he was troubled with the impasse between the ALL and Cosan-Rumo. He had been one of the main shareholders of ALL, alongside Jorge Paulo Lemann, Marcel Telles. The three entered the railroad business at the end of the 90s, after the privatization of the sector, while they were partners in GP investments, the private equity firm. In 2009, the trio sold its share in the company to BRZ fund manager.

Beto Sicupira was not fully into the negotiation, but it was he who brought Pércio de Souza in, another heavyweight in the national corporate landscape. Souza is the owner of Estáter, known as a boutique of business (whatever that means). In practice, he gained notoriety when creating financial equations, able to resolve conflicts between large corporations. He is known to have advised the businessman Abilio Diniz in complex episodes as the arrival of Casino to Brazil, in addition to the procurement of Ponto Frio and Casas Bahia. Not by chance, he was called the Abilio’s Banker.

Rumo-ALL

The contributions of the new company could reach $ 3,568,879,200.00, but depend on the renewal of concessions on the part of the federal Government

At that point, the impasse between the Cosan-Rumo and ALL resembled the courtyard of a concessionaire of agricultural machinery – it accumulated executives taken as true tractors in their areas of expertise. Besides Sicupira, Souza and Ometto, it also had names like Wilson de Lara, Chairman of the Board of ALL and a major shareholder of the company. They all had in common the discretion and strong personalities, which gave them impulse to the debate.

A scenario of skepticism

The rapprochement between the litigants, however, was not easy. A member of the board of ALL, who did not want to be identified, acknowledges that the climate between the two sides was heavy skepticism. Nobody believed in a negotiated solution to the problem, which had dragged on for months.

The control board of ALL was also cracked. On one hand, in the side pro-agreement with Cosan, were Wilson of Lara and investors Riccardo and Julia Arduini. Lara, incidentally, had agreed with the merger since 2012, when Ometto made a first proposal to embrace ALL. Cosan’s party states that, since then, already foresaw problems in fulfilling the contract.

On the opposite side, were BRZ management (with shareholders as Petros, Postalis and Valia), in addition to the Previ funds, Funcef and BNDES. The BRZ management, for example, did not have the slightest interest in the agreement. In theory, it had plans to make joint investments with ALL in ports, a sector in which Rumo was already working.

No one could give in

The dissent was not the only problem. In fact, the first draft of a solution to the impasse proved fruitless. The initial idea was to focus on 2009 contract, the ill-fated. A revision of the document could identify a middle ground, at which point both sides could compromise, and that could work as an island able to appease the conflicting groups. After that, in a year or more, the discussion would be forwarded to a proposal of corporate change – a merger. This hypothesis, however, would be left to the last rounds of a long struggle, when the antagonists, exhausted, would clinch and only manage to swap foolish punches in the middle of the ring.

It turns out that there was no halfway in that contract. A source involved in the process ensures that ALL could not recognize even the tenth part of the requirements set out in the ill-fated. On the other hand, Rumo had made contributions in works that, in practice, were a no-go. If they gave in and the deal evaporated, the company would lose value. To make matters worse, no one wanted to let their guard down during conversations. This is because in a negotiation like this, any sign of flexibility (such as the recognition of a problem) can be used against the company in a lawsuit later.

Salvation by merging

In other words, there was nowhere to run. The two companies were in an umbilical trap. It was in late December that a threat of consensus began to settle. The thesis that only the merger would lead everyone out of the alley consolidated. There started what some traders called the Atlas Project, name given to the negotiation. The title was inspired by the book the revolt of Atlas, by the philosopher and novelist Ayn Rand, published at the end of the 50s, whose plot unfolds around the railroad company. The work became a libel of ultra-liberalism. Today, it remains current and attends the bedside of entrepreneurs like Jorge Gerdau and Rubens Ometto.

In Cosan, on the other hand, the process was called Christmas project. From the perspective of executives of the group, ALL was getting a Seasons gift. So the deal was closed, Ometto Group paid a premium for ALL. The average of the market analysts pointed out that shareholders of Rumo (Cosan, Gávea and Texas Pacific Group) should stay with 42% to 45% of the railroad company. They took 36.5% and 9 of the 17 counselors. This difference was the prize. Cosan, however, took charge of the business.

Now, the merger agreement between the Rumo and ALL have to be approved by the Conselho Administrativo de Defesa Econômica (Administrative Council for economic Defense) (Cade) and the Agência Nacional de Transporte