* Cosan to pay more than 100 pct premium for railway stake
* ALL stake boosts Cosan role in agricultural transport
* Cosan to buy 5.7 pct of key Brazil
* ALL serves main agricultural regions of Brazil, Argentina
By Carolina Marcondes and Reese Ewing
SAO PAULO, Feb 22 (Reuters) - Cosan, Brazil's biggest sugar and ethanol group, agreed to pay more than double the market price for 5.7 percent of America Latina Logistica (ALL), a railway serving agricultural areas of Brazil and Argentina.
ALL controls a 21,000-kilometer railway network that links major agricultural regions in southern Brazil and northern Argentina with the key ports of Santos, Paranagua and Buenos Aires. A lack of suitable roads, rail links and ports has been one of the main limits to growth of Brazilian agriculture.
Cosan agreed to pay 896.54 million reais ($524 million) for 38.98 million shares, or 5.7 percent, of ALL, Cosan said in a statement to Brazil's securities regulator on Wednesday.
Shares of Cosan closed down 5.8 percent to 29.19 reais on Wednesday, the biggest one-day decline in more than six months, as investors questioned the wisdom of paying more than double the 10.34 real average price for the stock over the last month.
ALL's common shares reversed earlier gains to close down 1.8 percent at 10.83 reais in Sao Paulo late Wednesday afternoon, less than half the nearly 23 reais a share paid by Cosan for its stake.
Cosan's chief executive, Marcos Lutz, said in a conference call that Cosan agreed to buy ALL shares from some of the company's leading shareholders, Riccardo Arduini, Julia Dora Koranyi Arduini and investment fund Global Market Investments (GMI), rather than on the open market, and paid a premium in to have a material say in the day-to-day operations of ALL.
"The idea is not to control this company but to have a strategic position big enough to participate in the decisions. For us, it's key," Lutz told analysts on a conference call who were asking how he could justify paying such a high premium.
Premiums are often paid to become part of the controlling block of a major Brazilian company. French supermarket retailer Casino, which is set to take control of supermarket chain Groupo Pao de Acucar this year, paid a premium for its stake in the local retailer.
Pedro Galdi, chief strategist at the local trading house SLW, said Cosan will pay an above-market price for ALL shares because it is required in order to be part of the controlling shareholders' block in ALL's administration.
"The market wants to know: 'Why did it pay so much?' The market misinterpreted," Galdi said referring to the drop in Cosan share prices. "A controlling block is always more costly."
The purchase of ALL shares by Cosan is subject to approval by the market regulator.
"In the worst case scenario, losing this (premium of 400 million reais) would be serious but it would not be relevant to the company's (Cosan's) market cap," Lutz said. "On the other hand, if it puts us in another risk profile, with less risks, it's justified. This is what we were thinking."
Cosan, partner in a sugar and ethanol joint venture with oil major Royal Dutch Shell, should benefit from shipping sugar and ethanol on ALL's rolling stock and rail lines, which slice through some of Brazil's prime sugarcane areas in Sao Paulo, Parana, Goias and Mato Grosso do Sul states.
Lutz added that the company could use its own cash flow to pay for its stake in the railway operator if needed, and that Cosan's logistics division, known as Rumo, would benefit from collaboration with ALL.
Brazil is the world's leading exporter of sugar, coffee, orange juice and meats, much of which comes from the regions that ALL services.
"We are still designing the deal and the financing," Lutz said.