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September 21, 2009

JBS seeks pastures new with a meaty one-two

Seeking pastures new has long been a key growth strategy for JBS, the Brazilian meat group. And last week, JBS continued its policy of growth through acquisition with the announcement of two proposed deals - one with US poultry processor Pilgrim's Pride and a second with fellow Brazilian family-owned company, Bertin. Dean Best looks at how JBS is set to become the world's largest meat processor.

By Dean Best

Seeking pastures new has long been a key growth strategy for JBS, the Brazilian meat group. And last week, JBS continued its policy of growth through acquisition with the announcement of two proposed deals – one with US poultry processor Pilgrim’s Pride and a second with fellow Brazilian family-owned company, Bertin. Dean Best looks at how JBS is set to become the world’s largest meat processor.


With a meaty one-two, Brazilian processor JBS has – for now – grabbed the M&A spotlight away from UK confectionery giant Cadbury.


On Wednesday (16 September), JBS lined itself up to usurp Tyson Foods and become the world’s largest meat group. The company announced two deals that, should they be approved by anti-trust authorities, will, according to HSBC estimates, see its annual revenues grow to around BRL60bn (US$33.16bn).


The proposed acquisition of beleaguered US chicken processor Pilgrim’s Pride will see beef and pork group JBS spread its wings into poultry, while a merger of the enlarged group with Brazil’s Bertin will strengthen JBS’s domestic business.


Of course, we have been here before with JBS. In March last year, the company struck three acquisitions for a combined US$1.3bn in a bid to ramp up its presence in the US and Australia. However, 11 months on and JBS decided to abandon plans to seal one of those deals in the US, a planned US$560m purchase of National Beef Packing Co., amid concern from regulators and opposition from the US government.


This time, however, the Brazilians will be more confident of securing regulatory approval. The move for Pilgrim’s Pride, which entered Chapter 11 last December, signals JBS’s desire to diversify its protein business with its first move into the poultry sector. JBS has been keen to talk up the promise of greater scale and the prospect of hefty synergies, while the group also wants to use Pilgrim’s Pride to expand in Russia and throughout Asia. Scale is also key to JBS’s planned merger with Bertin, as well as a move into dairy and a boost to its processed products business.


Addressing investors on Wednesday, the company spoke at length about the synergies on offer from both transactions. JBS expects to see some BRL200m in synergies from the Pilgrim’s Pride and a further BRL500m from the Bertin transaction.


However, JBS president and CEO Joesley Mendonca Batista was also keen to explain how the acquisition of Pilgrim’s Pride would give his company a head-start in the poultry sector, which is a new business for the Brazilian firm.


“We recognise that Pilgrim’s Pride was the best option to start in this business. Pilgrim’s Pride is an integrated company and we understood that we could start in a new business in a leadership position,” Batista said.


And Batista said JBS could also bring something to the table, with its global reach boosting Pilgrim’s business overseas. “We expect to expand Pilgrim’s Pride exports by using our knowledge of export markets,” he said. “We have a very strong presence in many important markets like Russia, the Middle East and Asia.”


Jerry O’Callaghan, JBS’s investor relations officer, said the company would be able to beef up its domestic business through its deal with Bertin, as well as present itself as a stronger supplier to its retail and foodservice customers in Brazil. “It represents a potential gain in scale and expansion of our distribution channels through retail and foodservice,” he said.


The investment community seemed to welcome the company’s moves. Citi’s Carlos Albano upgraded his rating on JBS to ‘buy’ and said the proposed deals had “changed the company’s investment thesis for the better”.


“With the acquisition of Pilgrim’s, JBS has finally entered into the poultry segment, diversifying its revenue mix with significant advantages for the company, such as lower sanitary risks, cross-selling opportunities, and a turnaround opportunity,” Albano said.


“The association with Bertin should also bring significant advantages for JBS due to the significant synergy gains. JBS also diversifies its revenue mix in two other segments: dairy and leather.”


However, finalising both details will require a complex set of financial arrangements. The bottom line is that, once both transactions are complete, the Batista family, JBS’s controlling shareholder, will hold a 60% stake in the combined JBS, Pilgrim’s Pride and Bertin entity.


However, JBS is looking to raise the necessary funds for the Bertin deal through the sale of up to 26.3% in JBS USA in a private share placement.


Joesley Mendonca Batista also insisted the company would press ahead with plans for an IPO of JBS USA early next year, the proceeds of which will also be used to grow the company’s distribution network in the US.


JBS hopes to raise around US$4.5bn from the two moves to raise capital and also to keep its debt levels roughly similar to before the agreements were struck. The company pointed to a net debt-to-EBITDA ratio of 2.6x before the transactions – and 2.7x after the deals are done.


Pedro Herrera, an analyst at HSBC, said he was “postitive” about JBS’s two deals but said “hurdles” remain – not least the two capital raisings. “We are positive on the transactions, as they add poultry diversification in the US and scale in Brazil, yet integration of the assets will be challenging, in our view,” Herrera said.


“Both transactions are subject to approval by the US and Brazil antitrust authorities. The Pilgrim’s Pride transaction must also be approved by the US bankruptcy courts. The Bertin deal will have to be approved by CADE (Brazil’s antitrust entity), taking into consideration potential competitive issues related to cattle procurement.”


Nonetheless, Herrera acknowledged that the prospects of JBS breathing fresh life into Pilgrim’s Pride were good, given the company’s record with 2007 acquisition Swift & Co. “Historically, JBS has grown via acquisitions and successfully acquired distressed assets [like] Swift and returned them to profitability in a relatively reasonable time,” he said.


There remains a lot for JBS to chew over but what one executive labelled a “remarkable day” for the business may also have been the day that announced the Brazilian group at the food industry’s top table.

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