The humble chicken nugget grabbed the M&A headlines in the food industry this week after Brazilian food group Marfrig moved to buy the largest privately-held meat products company in the US, Keystone Foods.
On Tuesday (15 June), Marfrig said the US$1.26bn would help it grow to become one of the largest suppliers to food processors like ConAgra Foods but, notably, fast-food businesses McDonald’s Corp. and Yum Brands, the owner of chains including KFC.
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The acquisition is just the latest in a series of deals signed by Brazil’s largest meat processors, both domestically and abroad.
Last month, Marfrig’s UK arm Moy Park agreed to buy Northern Irish processor O’Kane Poultry, albeit for the less meaty sum of GBP13m.
However, last autumn, Marfrig spent $706.2m buying Brazilian poultry business Seara Alimentos from agribusiness giant Cargill.
In the last 12 months, rival meat processor JBS has acquired ailing US poultry giant Pilgrim’s Pride and come together with another Brazilian firm Bertin to create a JBS-led meat titan. JBS has also found time to buy two Australian firms – lamb business Tatiara and beef group Rockdale Beef.
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By GlobalDataNotwithstanding these deals, there has also been the merger in Brazil between Perdigao and Sadia. That transaction is still waiting on full approval from Brazil’s competition watchdog although, as Brasil Foods CFO Leopoldo Saboya told us last month, the all-clear is expected in the third quarter of the year.
The central driver of all this M&A activity by Brazil’s meat giants is scale. The likes of JBS, Marfrig and Brasil Foods are at the forefront of consolidation in the global meat sector as they see potential in supplying the world’s emerging economies – and growing demand from the emerging meat eaters in those markets – with product.
JBS, when it snapped up Australia’s Rockdale Beef in March, said the deal would expand its presence in that market but, crucially, also in Asia-Pacific.
Marfrig may have bought a US-based business in Keystone Foods but the chicken nugget pioneer serves over 28,000 restaurants in 13 different countries, including in Asia and the Middle East.
As Marfrig chairman and president Marcos Molina said on Tuesday: “The global food market is growing and Brazil has capitalized on this growth by strategically consolidating within the protein industry.
“By adding the resources and expertise of Keystone Foods and its management team, we are expanding Marfrig’s business with a scale and sustainable supply chain needed to meet the very significant growth opportunities within the industry and to attend to the needs of our global clients.”
Of course, with any over indulgence comes the threat of indigestion. Marfrig’s shares fell on Tuesday in the wake of the Keystone deal, amid concerns that the company was taking on too much.
Marfrig is still in the process of integrating the Seara acquisition it first announced last September.
And analysts at Goldman Sachs in Sao Paulo warned that Marfrig’s acquisition of Keystone raised an “execution risk”.
“The announced acquisition could raise execution risk at Marfrig, which is already highly leveraged, is going through an integration process with Seara, and is not generating positive cash flows,” Goldman Sachs analysts Gustavo Wigman and Claudio Lensing wrote in a note to clients, according to Reuters. Wigman and Lensing are recommending investors sell Marfrig stock.
Marfrig has issued debt that converts into stock to pay for the Keystone deal. Whether the Brazilian food group, part of its country’s expansion into the global meat sector, will over-extend itself remains to be seen.
