The creation of Brasil Foods awaits regulatory approval

The creation of Brasil Foods awaits regulatory approval

The creation of Brasil Foods, one of the world's largest meat groups, from Brazil's Perdigao and Sadia, was a rare mega-merger in 2009, when the global crash hit M&A. However, the deal is yet to win complete regulatory approval and, although parts of Perdigao and Sadia are operating together, Brasil Foods is yet to reap the rewards of the merger. In this month's just-food interview, Michelle Russell speaks to Brasil Foods CFO Leopoldo Saboya about the prospects for the business.

Last summer, as M&A in the food sector all but dried up amid the global economic downturn, one deal in the still-buoyant Brazilian economy caught the eye.

Two of Brazil's leading food group Perdigao and Sadia agreed to merge and create Brasil Foods, the country's largest food makers and one of the planet's largest meat processors.

The new company claimed it would be "an international powerhouse" of the food industry. With 42 plants around the world, Brasil Foods stood ready to leapfrog Tyson Foods as the world's largest poultry producer.

The company would also have a strong presence in the pork and beef markets and a dominant position in Brazil's frozen and prepared meal categories.

However, 12 months after Perdigao and Sadia agreed to merge, the deal is still awaiting full approval from Brazil's competition watchdog.

In that year, the combined company was able to bring some of its functions together but could not move forward and aim for the BRL500m (US$275.2m) in synergies promised by the merger - synergies yet to be realised.

In the last year, the enlarged group has also suffered from weak export markets as the downturn dampened demand, weighing on sales and earnings.

However, improving economic conditions have boosted the business and, earlier this month, Brasil Foods reported a first-quarter profit of BRL53m - against a net loss of BRL456.2m a year earlier.

And, speaking to just-food from Brazil, the group's CFO Leopoldo Saboya, is upbeat about the year ahead and insists the green light for the deal is near, allowing the company to progress with its plans.

"We don't have a precise date but we have an expectation for the merger to be fully completed by the third quarter of the year,” Saboya says. "It is quite a complex and comprehensive deal, which is why it is taking such a long time."

Saboya admits it is "not a perfect situation" but says Brasil Foods' management is able to run both companies in "an adequate way" and is preparing for when it secures regulatory approval.

"We have been able to operate the finances of both companies, so since the beginning, we have been operating the same policies, the same cash management and all the liability management together so it is fully operational," Saboya explains. "Since October that has also included sales and marketing. Despite the fact we are not fully merged, we are able to run the company in a good way."

He adds: "Of course it’s not a perfect situation until we are fully merged and integrated, but that is the way it is…but this timeframe will allow us to prepare ourselves in the very best way. We have enough time to roadmap all of our synergies and best practices."

After months of speculation and previous failed attempts to combine their operations, the announcement of Perdigao and Sadia's merger last year came as little surprise to the market.

Both Perdigao and Sadia posted quarterly losses before the merger was announced, as higher commodity prices and a tougher trading environment took their toll.

Sadia, in particular, struggled after huge losses on currency derivatives in the previous fiscal year saddled the group with high levels of debt.

Under the deal, Perdigao shareholders were to control 68% of the new entity, with Sadia operating as a 100%-owned subsidiary of Brasil Foods. 

"Both companies tried three or four times to create a merger but we didn't make it," Saboya explains. Of course, there were financial difficulties and that made it easier to talk, but it isn't an acquisition. It is a merger of equals and the reason for us joining together is to create an absolute winner in the marketplace, which will be a world-class global company, which will support more and more of our internationalisation. And our operations in Brazil of course are also absolutely important to us."

Brazil is one of the fastest-growing emerging markets in the world, with GDP growth at around 5% a year. Rising incomes is driving a growing middle-class in Brazil, which, Saboya says, Brasil Foods can capitalise upon.

"The number of consumers in the middle income brackets is really growing. More than 3m people are adding to that category each year. They are what we call the 'new consumers in Brazil,” he says. 

"We are seeing growth in foodservice in Brazil ... people are eating more out of home and we as a fairly well positioned player, having branded products and well known brands, will take advantage of that movement. We are not having such a huge growth in volume terms in the business, but we expect to take advantage of the good movement of the economy going forward."

Meanwhile, overseas, Brasil Foods is concentrating its efforts on its main export market, the Middle East, although the overall export picture has not been so rosy.

The economic downturn, Saboya concedes, had a “big effect” on Brasil Foods' export markets.

“It affected export markets like Japan, Europe and the Middle East. People stopped buying and simply went for a very ‘hand to mouth’ strategy and, as a result, it affected our domestic market because we had to shift more raw meat that we would otherwise have exported.”

Saboya insists, however, that toward the end of last year, and during the start of 2010, export markets have recovered.

Saboya remains coy about Brasil Foods' international ambitions, perhaps understandably so given regulatory approval for the merger, though expected, has not been won.

However, he says the company is working on a five-year strategic plan, which, he hints will be "a balance of organic growth and acquisitions".

The Brazilian food sector has seen other bouts of consolidation in recent months, including Marfrig buying Cargill-owned poultry business Seara Alimentos.

When Marfrig announced the acquisition of Seara, the group said the deal would give it a stronger branded portfolio to sell to Brazilian retailers and help the business compete with Brasil Foods at home and abroad.

Will Brasil Foods be looking to ensure it stays ahead of the game by following suit in Brazil, or the wider Latin American region?

Brasil Foods denied reports last year it was interested in acquiring Argentinean dairy group La Serenísima and Saboya refused to be drawn on whether the group had specific targets.

"All of the names you hear about are rumours. What I can tell you is that our future growth will be a balance of organic growth and acquisitions. For us to complete our international growth, acquisitions will be required but we are not dealing with any so far."

Nonetheless, a fully-merged Brasil Foods stands to benefit from increased scale in at home and abroad.

The company will also enjoy higher sales, as well as improved earnings, as it streamlines the operations of both businesses and enjoys economies of scale - if and when, of course, it secures regulatory approval.