Latin Finance - September/October 2010 - 62

Brazil meat sector focus

JBS Friboi is a bigger company by sales and market capitalization, and has a proven track record overseas thanks to the integration of Swift and Smithfield, where it has done a good job, says Rocha. JBS has also de-leveraged quickly, and is trading at 2.3-2.5 times net debt to Ebitda, she notes. Company presentations show that JBS bought Smithfield with negative operating margins and turned the business around in two quarters, says Rizzo. Finally, fears surrounding debt are compounded by a history of weak corporate governance and some overly-rosy forecasts made in the past. It is difficult to analyze and be sure what capex and working capital needs the meatpackers have, says Rocha. This is particularly the case for Marfrig, where the business has changed substantially. “You don’t have a confident basis for numbers,” she adds. Marfrig declines requests for comment.

well-defined and skillfully executed strategy are keys to success. But there is concern that the people in charge at Brazil’s new meatpacking giants lack sophistication to compete on a global stage. The Brazilian press has had a field day mocking the provincial accents and grammatical slips of the owners of JBS Friboi and Marfrig in Portuguese, while their English is basic, although Minerva’s Queiroz is fluent. That may not matter. Mariana Peringer, analyst at Banco do Brasil Investimentos in São Paulo, sees hands-on experience as a distinct advantage. BB DTVM, the investment arm of Banco do Brasil, has close to 350 billion reais in AUM. “Having grown up in the industry, in butchers’ families, these managers understand how the business works very well. They are comfortable in meatpacking plants and hanging out with farmers,” she says. Others wonder, however, about the ability of the management with blood on their aprons to run a global Pyramid Structures distribution business and build brands. The models are widely Some investors and analysts find the role of the BNDESPar disquieting with whopping investments of 18 billion reais in the different. BRF is the market darling, with more transparent operations and less volatility, says Wigman. Investors favoring industry. Smaller slaughterhouses have told local media that they are unhappy BNDESPar did not bail them out, and complain Marfrig and JBS are taking on bigger risks in strategy execution but may achieve higher returns, thinks Peringer. that the intervention was political and partisan. JBS is looking to consolidate production in key regions, The acquisition of a stake in Pilgrim’s Pride and a merger with Bertin during December 2009 by JBS were funded primarily says Wigman. It is in the top three of the four largest producing countries – Brazil, US, Argentina and Australia – and seeking to with equity through the issuance of $2 billion in mandatory improve margins on the back of scale, he notes. The platform convertible debentures, and a 1.6 billion reais equity sale in is strong and global, but margins are low, and JBS is more May 2010. In February, JBS sold 3.48 billion reais in 60-year focused on production than distribution and branding, says convertible debentures with BNDESPar subscribing to 2.27 Peringer. billion reais. In July, Marfrig confirmed that BNDESPar would Marfrig meanwhile has expanded its business from take up to 100% of the 2.5 billion reais in convertible debentures distribution to international branding with the purchase of issued to purchase Keystone. Seara, in a bid to become a rival to BRF, says Wigman. Peringer As the convertibles are exercised, the concern of the market thinks that this will pay dividends in the long-term, and notes moves from high leverage to the huge stake of BNDESPar, that management has said that spending so far has been lower and what role it will play, says Wigman. If all conversions are than expected, but had a bigger impact on sales. exercised, BNDES will own nearly a third of both Marfrig and JBS, he points out. Fattening Up Returns “[BNDES] is throwing money at these companies at a level Brazil is now the undisputed global cattle leader. It has 180 that’s never been seen before,” says Mauro Cunha, head of million head of cattle compared to 95 million in the US, 50 equities at Mauá Sekular Investimentos in São Paulo, which million in Argentina and 28 million in Australia, says Wigman. has 550 million reais in AUM. Cunha owns BRF but none of the Moreover, long-term trends support Brazil: US inventories meatpackers. have been declining since the 1970s, Australia is facing longCunha is concerned by moral hazard and points out that BNDES may concentrate risk as it handpicks the sector’s winners term drought issues and has been replacing cattle with soybeans while Argentina faces short-term problems related to tight and losers. He adds that even though the meatpackers are supply of cattle and government intervention, he says. Since the listed on the Novo Mercado, which demands high corporate 1990s, the perception of Brazilian beef overseas has improved governance standards: “government-provided leverage is and efficiency gains have been made, says Wigman. That should creating huge pyramid structures that go against the very spirit boost Brazilian prices compared to traditional competitors. of those standards.” That puts the pieces of the jigsaw together to allow a smaller BNDESPar is already stretched in the sector, and meatpackers group of better organized meatpackers to capture fatter returns. need to wonder when the government bank might start selling “Margins in the sector will get much better. In the past, it used to stakes, or taking a more active role in management, Wigman says. Listings of subsidiaries may be an exit route, but JBS, which be a bad business,” says Rizzo. Wigman predicts margins could jump from around has been planning an IPO in the US, has not been able to get the 7% in August to 9%-10% in the next few years, helping deal off the ground owing to weak markets. these companies out of a debt hole. “The market is more consolidated and getting more organized. That will bring Blood on the Apron better margins,” agrees Queiroz. LF The high debt overhang means that strong management and a

62 LatinFinance

September/October 2010

Latin Finance - September/October 2010

Table of Contents for the Digital Edition of Latin Finance - September/October 2010