Moy Park sale a win-win for JBS and Marfrig

Moy Park sale a win-win for JBS and Marfrig

Brazilian protein giants Marfrig and JBS have reached an agreement that will see the ownership of European poultry processor Moy Park transferred to JBS. The deal, which values Moy Park at US$1.5bn, represents a win-win for both parties. Here is what each stands to gain.

JBS takes control of Moy Park

1. A grand entry on the European stage
Moy Park is a UK-based fresh poultry group that boasts an impressive growth story: between 2012 and 2014 revenue has grown a near-40% and the firm currently operates 13 production units. Moy Park will become JBS's first Europe-based meat production company (JBS currently owns businesses in the Americas and Asia Pacific). The business generates 79% of sales in the UK and the remainder in continental Europe. Speaking during a conference call, JBS CEO Wesley Batista commented: "This is a moment for us to enter the European market, it is good timing to enter Europe with production, with innovation and with brands. And particularly we are pleased to have the opportunity to enter through the UK market which is one of the economies that has been performing best with population growth, with consumption growth."

2. Leveraging relationships
JBS currently exports meat products worth around $1bn to Europe from its production centres in Latin America, Australia and the US. The company hopes to leverage Moy Park's relationships with retailers and foodservice customers in the UK and elsewhere to grow this figure. "We see the opportunity to develop strong relationships downstream with the customers that Moy Park already services, particularly the big UK retail and foodservice customers, in order to enhance our sales from outside of the European Union into those channels as well," Batista explained. Significantly, Moy Park's focus on the poultry sector means there will be little overlap and therefore sales dilution in the areas where JBS hopes to grow meat exports to Europe – primarily beef and also pork.

3. Leveraging know-how
JBS believes it will benefit from Moy Park's technological know-how. The company generates 51% of its revenue from processed food products, an area that JBS has been stepping up its activity in. The world's largest protein group recently acquired Australian processed meat group Primo and it has been ramping up its efforts to add value to meat through branding and the production of ready-to-eat lines at its Brazil-based subsidiary JBS Foods. The Moy Park acquisition expands JBS's prepared foods portfolio, with an emphasis on high-value added products and brands. JBS also flagged Moy Park's experience in producing natural and organic poultry products. The company said there has been an increase in demand for these lines in Europe and North America, where JBS owns chicken processor Pilgrim's Pride. Batista commented: "The acquisition of Moy Park represents a relevant participation in the natural and organic poultry category. Particularly in Europe, we have seen growing consumer awareness in where their products are coming from... We also see this in North America with a big move away from antibiotics... Moy Park is a relevant company that brings us a lot of knowledge around natural and organic poultry production."

4. Synergies
JBS said that based on its "initial" impressions, it expects to generate annualised synergies of $50m. These synergies come in the form of purchase synergies in non-core materials as well as the adoption of best practise in handling and operations. JBS has a strong track record of boosting profitability at businesses it has acquired – more than a dozen in the past ten years – and Moy Park's existing management is experienced in operating as part of a global business. Analysts believe this bodes well for Moy Park. Clive Black, head of research at Shore Capital, told just-food: "Moy Park's management is used to working within an international organisation, which JBS is and a Brazilian one at that, so that augurs well. JBS is expanding rapidly too and so hopefully for both parties it will be a strong combination."

5. The bottom line
JBS has spent about US$7bn on overseas acquisitions since 2007, and the $1.5bn Moy Park acquisition adds a hefty chunk to this figure. The company was, however, quick to stress that the deal is not expected to have a material impact on current indebtedness. JBS revealed net debt to EBITDA is expected to rise slightly to 2.54 times, from 2.3 times at the end of the first quarter. Batista said the group will primarily use currently cash flow to fund the deal. With around 80% of group sales generated in dollars, JBS has seen its results lifted by the depreciation of the Brazilian real this year, and this has been used to paydown debt and raise cash on hand levels. "This acquisition is relevant and strategic, but it's not an acquisition that is relevant from the point of view of our balance sheet or leverage," Batista said. Moy Park generated net revenue in the first quarter of 2015 of $500m. The group's contribution will further boost JBS's cashflow without a material impact on its interest payments – meaning that Moy Park should benefit JBS's bottom line in the near-term as well as unlocking future earnings potential.

Marfrig eyes a return to profits

1. Paying the piper
Marfrig will no doubt be pleased with the transaction multiple, which stands at 7.85 times estimated 2015 EBITDA. The Brazilian company had long flagged its intention to separate Moy Park and the group had been waiting for the right conditions to launch an initial public offering. With the London IPO market down, a sale to JBS represents a stronger solution than an IPO. According to UBS analyst Lauren Torres, Marfrig secured a "full but fair" price for the business. "We believe JBS paid a full but fair price for Moy Park. To recall, Marfrig paid 5.6x for Moy Park and OSI Group's poultry business in Brazil in 2008. In 2014, Moy Park delivered 17% revenue growth to BRL5.5bn, with almost 100bps of EBITDA margin improvement to 7.4%. Moy Park has a 70 year track record in the UK of providing poultry and convenience foods to top retailers," Torres wrote in a note to investors.

2. "On the road to profitability"
Marfrig's desire to offload Moy Park originated from the strategic necessity for it to pay down debt. The company’s ratio of net debt relative to adjusted earnings rose to a massive 6.3 times in the first quarter. "The transaction significantly improves Marfrig's capital structure, accelerating expected reduction in its financial leverage and the associated interest expense," chairman Marco Molina said during an analyst call. Once the transaction is closed, free cash flow should improve and Marfrig said it expects to accelerate the company’s deleveraging process. Marfrig said that, given certain foreign exchange assumptions, indebtedness should be reduced by BRL5bn to BRL5.7bn. "It reduces almost by half our gross debt and also reduces in a very important way the interest that we pay every year. It puts Marfrig back on the road to profitability," Molina said.

3. Regional focus
Marfrig said that the disposal of Moy Park reinforces its "focus to win" strategy. The company is simplifying its operations as it prioritises the generation of financial returns. As part of this drive, the group is zoning in on certain regions, particularly Asia and North America, where it sees the greatest growth potential. Chief executive Martin Secco insisted that Marfrig remains a "global meat company" after its exit from Europe. The firm will have operations in 11 countries and 59% of its net revenue will be generated by international operations. However, Marfrig believes that by concentrating its efforts in areas that are witnessing the most rapid growth it will be able to maximise its return on investments.

4. Foodservice potential
The company is also focusing its attention on foodservice and de-emphasising the importance of the retail channel in its operations. "Despite Moy Park being a good business, it is highly focused on the retail segment," Secco said. Marfrig indicated that it will concentrate on growing its Keystone foodservice business in Asia and the US. The company suggested that its foodservice customers in Asia are witnessing "double digit" growth and Marfrig plans to grow with them. Significantly, Marfrig suggested that its foodservice business generates higher margins than its retail interests. Between 2013 and 2014, net revenue increased from BRL14bn to BRL15.5m and Marfrig's remaining businesses – Keystone and Brazilian beef – contributed 11% to the sales growth. These businesses contributed 21% to margin expansion.

5. Brazilian beef exports
Following the disposal of Moy Park, Marfrig also plans to increase its exports of Brazilian beef. Speaking during a conference call, management said that it anticipates the global market for Brazilian beef to open up – and Marfrig plans to take full advantage. At the same time as leveraging export opportunities to drive growth in the Brazilian beef unit, Marfrig intends to improve efficiency through plant capacity optimisation. "We will also be seeking to improve the nature of the Brazilian business, focusing on reducing costs and improving productivity," Secco revealed.