Cosan, Shell sign binding deal on ethanol venture

* Final agreement adds Cosan biomass business, BNDES debt

* Deal hangs on regulatory approvals in Brazil, Europe (Adds details)

SAO PAULO,- Royal Dutch Shell Plc (RDSa.L) and sugar and ethanol giant Cosan signed a binding agreement on Wednesday that will create Brazil's No. 3 fuel distributor, as well as explore international ethanol and sugar opportunities.

The joint venture, with estimated annual sales of $21 billion, was modified since its initial announcement in February to include all of Cosan's energy generation business and an additional 500 million reais ($283.6 million) in debt owed to Brazilian development bank BNDES.

Cosan (CSAN3.SA), the world's largest sugar and ethanol producer, also said in a securities filing the initial accord was changed to make the venture a global biofuels provider. As a result of that, Cosan and Shell are barred from competing with the new entity.

Although the venture will not sell ethanol outside Brazil except where it has biofuel production units, Shell will share its Iogen second generation cellulosic ethanol technologies with Cosan's vast experience in cane ethanol production.

The deal will give Cosan new financial leverage to expand its sugar and ethanol production in Brazil, while improving the company's debt to equity, which affects its cost of capital. If the deal is approved by regulators, the credit risk ratings on Cosan bonds should improve, Cosan said.

The two companies agreed that after 10 to 15, years one of the two would buy out the other's holding in the new company and thus end the joint venture. The deal is expected to be concluded by early 2011.

Cosan has all of its sugar and ethanol mills in the venture, as well as fuel distribution assets it bought from Exxon Mobil Corp (XOM.N) in 2008. Shell is investing $1.6 billion in the deal, which will also take on $2.5 billion of Cosan's debt, in addition to its 500 million reais debt to the BNDES.

source: reuters