JBS SA (JBSS3), the world’s largest beef producer, plunged after announcing it will take on $2.7 billion in debt from Marfrig Alimentos SA (MRFG3) in exchange for meat-processing plants in Brazil to expand its poultry business. Marfrig shares surged.
JBS dropped 6.9 percent to close at 6.64 reais in Sao Paulo, the most since Sept. 4. Marfrig led gains in Brazil’s benchmark index, jumping 6.2 percent to 7.91 reais. JBS’s bonds due in 2018 dropped 2.5 cents to $1.04, the biggest slide since Sept. 26, 2011. Marfrig’s 2020 bonds rose 7 cents to 98.33 cents on the dollar, the biggest surge since April 19.
JBS Chief Executive Officer Wesley Batista, who said last week that the company passed on a bid for Smithfield Foods Inc. (SFD:US), will assume 5.85 billion reais ($2.74 billion) in debt for Marfrig’s Seara poultry and pork unit in Brazil and the Zenda tannery unit in Uruguay, the Sao Paulo-based company said in a regulatory filing today. The purchase would see JBS, which had total debt of 21.2 billion reais at the end of last quarter, overtake Springdale, Arkansas-based Tyson Foods Inc. (TSN:US) as the top (TSN:US) poultry producer.
“We will have to delay our deleverage process a bit,” Batista said today at a Sao Paulo press conference with Seara CEO Sergio Rial, without offering a new timeframe. “The acquisition should help generate cash, which will help cut debt.”
JBS will receive a mix of long- and short-term debt, with 65 percent denominated in dollars and the rest in reais. For Marfrig, the deal means a cut in net debt that jumped sevenfold in the past five years to about 10 billion reais as of March 31.
Batista said there are no plans to refinance the transferred debt with either bonds or shares. Buying Seara means JBS will take on Marfrig’s soccer World Cup sponsorship contract as well as 21 distribution centers.
“Markets are uncertain about how much value Seara can add,” Felipe Rocha, an analyst at brokerage Omar Camargo, said in a phone interview from Curitiba, Brazil. Investors are concerned by “several factors: JBS’s leverage level, Seara’s profit margins, the short-term debt, it all adds pressure.”
Acquisitions are part of JBS’s DNA, Batista said May 15 in an interview in which he added that the company wasn’t in active talks. Still, the deal comes a week after Batista said in an interview that JBS didn’t bid for Smithfield because the price was too high.
Shuanghui International Holdings Ltd., China’s biggest pork producer, agreed to buy Smithfield, Virginia-based Smithfield for $4.7 billion in cash, or $34 a share, the companies said May 29. Smithfield is the world’s biggest hog producer.
JBS entered the chicken processing business in 2009 with the acquisition of a controlling stake in Greely, Colorado-based Pilgrim’s Pride Corp. (PPC:US) The company last year leased Brazil poultry plants from France’s Doux SA and Agroveneto.
Beef accounted for 64 percent of JBS’s revenue in the year ended Dec. 31, according to data compiled by Bloomberg. JBS, which has gained 19 percent since Jan. 1, generates 22 percent of its sales from chicken meat, its second-biggest revenue source, according to the data.
Marfrig’s purchase of Seara from Cargill Inc. for $706.2 million in cash and $193.8 million in debt was completed in January 2010, according to data compiled by Bloomberg.
Marfrig owns three food-processing units under the Seara Foods umbrella: Seara Brasil, which supplies chicken nuggets, sausages and hot dogs to the Brazilian market; Keystone Foods, supplier of hamburger patties to McDonald’s Corp.; and Moy Park, in Europe, maker of ready-to-eat chicken meals endorsed by celebrity chef Jamie Oliver.
Seara Brasil’s 32 plants slaughter about 2.6 million chickens daily, Batista said today.
Marfrig’s net debt equals 4.4 times earnings before interest, taxes, depreciation and amortization. Marfrig aims to cut gross debt by as much as 2 billion reais, Seara’s Rial said May 14.
“Historically food has usually been a neglected sector for investment, but that’s changing,” said Victor Lean, Singapore-based managing partner of Caudex Asia, a food and agriculture private equity firm. “We’ve started a cycle where the food price trend, after decades going down, is actually heading up due to structural deficiencies in the supply chain.”
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