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INTERVIEW-Further Brazil sugar M&As seen from 2003

By Peter Blackburn

RIO DE JANEIRO, Brazil, June 28 (Reuters) - More Brazilian sugar mergers and acquisitions are expected when the dust settles after October's Brazilian presidential elections and investor uncertainty subsides, a Brazilian consultant said on Friday.

"More M&As will happen in the sector as there are several elements that attract investment to Brazil," Luis Lopez, senior manager at KPMG Corporate Finance, told Reuters in a phone interview.

Lopez, author of a report on M&As in the Brazilian sugar and biofuel sector, said that several companies were still looking for investment opportunities. He declined to give any names.

Foreign buyers, including Louis Dreyfus, Glencore, France's Beghin-Say, Union SDA and Sucden, were involved in six out of the 27 deals concluded between 1994 and 2002.

As the world's largest sugar and fuel ethanol producer, Brazil enjoys substantial economies of scale.

Its sugar output costs are probably the world's lowest.

The Sao Paul Cane Agroindustry union (Unica) estimates costs in the main sugar producing state of Sao Paulo at $190 a tonne, compared with $270 a tonne in Australia and $480 a tonne in the European Union.

Another incentive for foreign investors is a free market.

"The deregulation of the Brazilian sugar industry (at the end of the 1980s) made it very attractive for foreigners," Lopez added.

But it was only in 2000 and 2001, that investors jumped in and concluded 18 M&As, compared with only nine between 1994 and 1999.

COMPETITIVE EXCHANGE RATE

Lopez noted that a sharp devaluation of the real in 1999 helped to make Brazilian exports more competitive.

But a slowdown in M&As is expected in 2002.

"There will probably be less this year due to electoral uncertainty," Lopez said.

So far this year only two deals have been concluded - sales of the Bela Vista and Santa Cruz mills to local buyers.

Left-wing presidential candidate Luiz Inacio Lula da Silva currently commands a huge lead in opinion polls, fanning investor fears about Brazil's ability to manage its $250 billion debt in event of a leftist victory.

Brazil's credit risk was recently downgraded by two ratings agencies.

Election uncertainty helped on Wednesday to push Brazil's real currency slid to a record low of 2.881 per dollar.

However a weak real may attract foreign investors as it makes Brazilian sugar and ethanol exports cheaper and more competitive.

On the other hand, low world sugar prices and a bearish outlook could offset the currency advantage.

However Lopez said that experience in recent years didn't suggest a direct link between prices and the number of M&As.