JBS has made another acquisition in Australia and is eyeing markets in Asia

JBS has made another acquisition in Australia and is eyeing markets in Asia

Brazil-based JBS is already the world's largest meat supplier but it is setting its sights on growing further in value-added products and in Asia - and has turned to M&A to help it achieve that goal.

The company already supplies meat into Asia, mainly through its business in Australia, a market it first entered in 2007 with the acquisition of US-based Swift & Co.

And JBS has sought out another Australian business to ramp up its presence in Asia. It has struck a deal to buy Primo Smallgoods, the largest supplier of products including ham and bacon, in Australia.

JBS has agreed to pay private-equity firm Affinity Private Equity and the Lederer family that co-founded Primo A$1.45bn (US$1.26bn) for a business that dominates the Australian market for smallgoods - meat products such as bacon and sausages - and is the largest supplier of bacon and ham in New Zealand but which has a small export presence.

The deal was announced alongside a second, smaller, bolt-on acquisition in Brazil. JBS is to add to its domestic business with the purchase of local poultry processor Big Frango Group.

However, more attention was placed on the move for Primo. At a stroke, the deal will broaden JBS's portfolio to more value-added packaged meat categories to give it some shelter from the more volatile commodity meat markets - a strategy used by the company's peers around the world, notably this year with Tyson Foods and its acquisition of US group Hillshire Brands.

Just as notably, Hillshire was a business in which JBS was interested, tabling what was ultimately an unsuccessful rival offer through its US arm Pilgrim's Pride.

The price JBS has agreed to pay for Primo compares favourably to that deal and to the value of other processed meat groups in the sector, analysts said today.

Deutsche Bank analyst Jose Yordan said the A$1.45bn price tag equated to a EBITDA multiple of 9.7 times - or 8.1 times should the synergies JBS has lined up materialise.

"Considering Primo's product mix - 80% processed and 20% in natura - and geography, we believe it compares quite favourably with the current multiple of comparable companies like Hormel Foods (12x) and the recent sector average for M&A (12.9x), not to mention the multiples paid by Tyson for Hillshire (greater than 16x pre synergies and 13-14x post synergies)," Yordan wrote in a note to clients today.

Citing data from researchers Aztec, JBS said Primo accounted for over 50% of smallgoods sales in Australia, with brands including Primo Quality Meats, Hans and Beehive. Its nearest rival, Associated British Foods' George Weston Foods, is some way behind with a market share of below 20%.

Markets for products like sausages and bacon in Asia are, unsurprisingly, relatively small, and Primo only has a fledgling export business.

However, in a conference call with analysts today, JBS's management highlighted the potential opportunities it believes the deal will bring the business in Asia.

"The company has very strong brands - 50% share in the Australian market - but export is not meaningful. This is exactly where we see the largest opportunity is to expand this business, in markets like South Korea, Singapore, Hong Kong, China and others," JBS CEO Wesley Batista said. "This is where we see the biggest opportunity to grow this business and build very strong brands across the Asian market. With the Primo position, we are going to have a very unique operation and platform to serve the Asian market."

In the near term, markets like Singapore and Hong Kong - countries were eating habits are, on balance, slightly more western than the norm in Asia - could be the most fruitful for JBS as it seeks to build Primo's export presence.

However, analysts were keen to hear what opportunites JBS saw in China. Pork is the most eaten animal protein in China - data from Euromonitor showed just short of 50m tonnes of fresh pork was eaten in China in 2013. Total meat volumes were 78.6m tonnes.

Primo does supply fresh pork, although 80% of its sales are from processed products, Batista said. Nonetheless, demand for foreign-supplied meat products are on the rise in China, as is interest in value-added pork products, both factors in the sale of Smithfield Foods to China's Shuanghui Group (now WH Group) last year.

JBS insisted it does see potential in China and also pointed to Australia in recent days signing a free trade agreement with Beijing, which will see tariffs of 12-25% lower to zero within a decade.

"Australia already exports a lot of fresh products to China. China today is the third-largest export market for Australian beef and lamb. This was zero three, four years ago. That's the relevance of China today," Batista said. "Australia exports very little smallgoods, processed meats [but] that's the upside that we see in this market, considering the capacity we have to expand. Considering the capacity of JBS and the footprint of JBS in Asia, we can do much more export than we can do today. The amount Australia products to export of smallgoods is relatively small, less than 10% of what Primo produces today goes to export. Our footprint in Asia, our capability to reach final customers and how competitive Australia is, we can grow a lot in this area."

Shares in JBS rose today, suggesting a positive market reaction to deals Batista said were "very strategic" and "very accretive" to the business. JBS said it has the cash to fund the deals but it did indicate it will likely look to the markets to refinance after working out the most tax-efficient structure. Yordan noted the acquisitions would increased JBS's leverage ratio but said that "should only be temporary".

At 16:41 Brazilian summer time, JBS's shares were up 5.53% at BRL12.22, as the company, thwarted in the high-profile battle for Hillshire in the US four months ago, set about - anti-trust approval pending - using an Australian business to meet its value-added and Asian ambitions.