One is a tousle-haired Brazilian diplomat turned entrepreneur, brimming with enthusiasm for what he calls “the most extraordinary business opportunity I have ever seen in my life”. The other is a close-cropped, blue-eyed Englishman, fond of quietly pertinent rhetorical questions.
Sérgio Thompson-Flores is chief executive of Infinity Bio-Energy, a company that last year raised £270m ($543m) (€385m) on London’s small-cap Aim market.
Peter Thompson is chairman of Clean Energy Brazil (CEB), a partnership formed by Czarnikow, a London-based provider of sugar market services, Numis, a London-based investment bank, and Agrop, a Brazilian sugar industry service provider. It is also listed on Aim, and raised £100m in December 2006.
Both aim to grab a share of the fast-growing ethanol industry in Brazil, a country that many say is poised to become the “green Saudi Arabia”.
But there the similarities end. The start-ups diverge on how best to achieve a stake in a tough and crowded market. Their fortunes will be eagerly watched by other entrepreneurs.
Rising oil prices have made fuel ethanol an attractive proposition. About 89 new projects are under way in Brazil’s sugar and alcohol industries, involving investments of $17bn (€12bn). But the rush to invest has driven asset prices skyward. As sugar prices have fallen, a third of the projects may be on hold, according to Unica, an industry association.
Yet few would question ethanol’s potential. In Brazil, fuel sold as gasoline is up to 25 per cent ethanol. Pure ethanol is universally available. Almost 90 per cent of new cars are “flex fuel”, running on gasoline or ethanol or any mix of the two. Yet because of the slow rate of replacement, only about 12 per cent of cars are flex fuel overall, so huge expansion lies ahead. Were other markets to follow Brazil’s lead – and several are gearing up – growth would be explosive.
CEB is a classic investment banker’s creation. Asked to describe its origins, Mr Thompson is candid. “The creative spark came from Numis. They saw a market that investors wanted to put money into, but no sensible vehicle was available. So they decided to develop a company and list it.”
That meant acquiring managers with experience in Brazil and on international markets. Numis had already floated a carbon credits company for Marcelo Junqueira, Agrop’s founder and a leading figure in Brazil’s sugar industry. With him on board, they looked for international market expertise. “All roads led to Czarnikow,” says Mr Thompson.
The door was already open. Czarnikow, where Mr Thompson made his career, had been looking for Brazilian assets for a hedge fund client, which wanted a listed company rather than a private equity investment.
“People aren’t interested in giving their money to an investment manager who might sit on it,” Mr Thompson says. “They’re much more interested if you have the investments lined up.”
CEB does not buy sugar mills but forms joint ventures. Typically, these are family businesses in their second or third generation. “The money goes to the business, not the shareholders. The family puts in its assets. We put in the cash and transform their lives by building a new business.”
Asked what he thinks of this approach, Sérgio Thompson-Flores begins to grind his teeth – the only sign of irritation to dent his boyish enthusiasm.
The former diplomat also had experience in trade and finance when he was called in to run a government investment bank, later joining the private sector as a turnround specialist. He formed Infinity along with US investment firm Kidd & Co after being retained by a sugar mill.
“We believe it is absolutely vital to own and control the mills to ensure quality of management,” he says. “You have to have the freedom to work the capital structure and make decisions that enhance shareholder value.
“We don’t believe this can be done with another shareholder that is a family-run business. The motivation factors are substantially different. We are driven by the search for optimum return. When people own land or cane there is an emotional attachment.”
In contrast to CEB’s triple-headed structure, Infinity is almost ruthlessly concentrated. Procurement, accounts payable, sales strategy – these and all other operations are controlled from its São Paulo headquarters. “In the boardroom we have real-time monitors where we can see all operations at all our mills by the month, week or hour,” says Mr Thompson-Flores.
CEB has outperformed Infinity on the London Stock Exchange’s Aim market. From £102.50 at its first close in December, CEB’s share price peaked at £124 in April and has since fallen to £111. Infinity has fallen over the same period, from 533p to 513p, though it has recovered somewhat from a low of 508p in June.
People familiar with both companies say investors are more comfortable with CEB’s partnership approach and its insistence on lining up investments before going to the market for money. They say Infinity has not been as good at allocating resources and hiring the right people. Mr Thompson-Flores rejects this, saying Infinity’s investments are on schedule. This week, it announced the purchase of five new mills.
Perhaps the most striking difference between the companies is their vision of how the market will develop. Before Brazil can become the main global supplier of a new global fuel, the world’s big markets will have to introduce new laws and infrastructure – a massive undertaking. This divides investors into cautious, domestic ones and ambitious, international ones.
Mr Thompson’s experience at Czarnikow makes him wary of “commodity dramas”. CEB’s focus, he says, is on domestic growth in Brazil. “You have to ask yourself very carefully what is the potential return on cash flow, and can we acquire assets in a way that captures their capital appreciation.”
Mr Thompson-Flores is altogether more visionary. “We are in at the birth of a whole global industrial complex based on ethanol."
Exports of ethanol to go full-throttle
In January President George W. Bush announced a target of substituting renewable fuels for 15 per cent of US gasoline consumption – the equivalent of more than 130bn litres of ethanol a year, compared with world production of about 50bn litres.
Infinity Bio-Energy is among those aiming to tap such demand. Sérgio Thompson-Flores, founding partner and CEO, says exports will account for 10 per cent of sales this year, 30 per cent next year and at least 50 per cent by 2009.
Infinity recently announced acquisitions in Central America and the Caribbean as part of its planned supply chain to the US market. “We will ride the Brazilian wave to begin with,” Mr Thompson-Flores says, “but our focus will quickly shift to the international market.”
Peter Thompson at Clean Energy Brazil is more cautious. “We aim to offer the capacity and expertise to help our partners grow and to be part of the consolidation of the industry,” he says. “People are coming in with a different rationale based on the price of oil versus the price of ethanol as they want ‘in’ at all costs. But we are making sure of paying dividends to our investors.”
