US Organization for Competitive Markets alarmed at deal

US Organization for Competitive Markets ''alarmed'' at deal

A grab by Marfrig Global Foods for a controlling stake in National Beef Packing Company is ruffling hairs in the US cattle industry as the deal tightens Brazilian meat producers' stranglehold on the international market. 

Marfrig announced this week it would pay US$969m for 51% of Missouri-based National Beef, an acquisition it said would make the Brazilian firm the world's second-largest beef producer with combined sales equivalent to $13bn. 

Although it is difficult to make size comparisons across the global meat sector because some companies concentrate their business in one animal product while others are more diversified, Brazil giant JBS ranks at the top of the world order with sales of more than $49bn in 2017.

On a presentation call this week, Marfrig chief executive Martin Secco described the deal as a ''win-win alliance'' and a ''really good complementary fit''.

As well as the US, National Beef has a strong presence in Asia, with Japan its biggest market, accounting for almost 50% of export revenues followed by China's 13.6%, which the company said comes mostly from leather sales via its tannery. Outside of Asia and North America, Mexico contributes 10% to the firm's overseas sales.

National Beef has the capability to slaughter 12,000 heads of cattle a day, and accounts for 13% of US slaughtering capacity.  

Meanwhile, Marfrig's business operations are concentrated more in Brazil, Uruguay and Chile. In a statement outlining the acquisition, the company said it is the second-largest beef operator in Brazil, the largest beef processor in Uruguay and the largest beef importer to Chile.

However, Marfrig supplies the North American market with beef sourced from Uruguay, which enables the company to circumvent a US ban on Brazilian beef imports stemming from an outbreak of foot-and-mouth disease.

Reuters reported CEO Secco as saying Uruguay has a quota to sell 20,000 tonnes of fresh beef into the US a year without tariffs, of which Marfrig grabs a 25% slice.

Secco said in his presentation: ''Marfrig will be in a strong position in the most important areas regarding commercial and production of beef around the world - that's the Americas region - with strong and global suppliers around the world.''

News of the deal has rankled the United States Cattlemen's Association (USCA) and local anti-trust body, the Organisation for Competitive Markets (OCM), whose overriding concerns stem from the increasing consolidation in the global meat arena, and particularly the increasing dominance by Brazilian beef producers.

Jess Peterson, a senior policy analyst at USCA, told just-food: "The recent news detailing Brazilian meat processor Marfrig's plans to buy a majority stake in the United States-based National Beef Packing is concerning for US cattle producers.'' 

And it was a theme echoed by The Organization for Competitive Markets, which said it is ''alarmed'' at the announcement.

''With Brazil's JBS being the largest beef processor, these foreign corporate giants will dominate the US beef market, putting US farmers and ranchers at their mercy,'' OCM commented in a statement to just-food. 

That said, there has so far been no response from US regulators who opposed a deal for National Beef back in 2009, when JBS terminated a plan to buy the company after the US Department of Justice filed a lawsuit to block it on competition grounds.

The USCA also poured more water on the fire this week by questioning the objectives behind the deal given the suspension on Brazilian beef imports to the US. Japan and China were also among a number of countries that blocked shipments.

And more recently, the EU has said it is considering a ban on meat imports from Brazil in the wake of last year's so-called Carne Fraca, or ''Weak Flesh'' probe, which engulfed JBS and the country's poultry processor BRF.

The investigation centred on allegations of corruption by officials at Brazilian meat processors who were said to have paid bribes to government inspectors to overlook unsanitary conditions.  

Marfrig's Secco said he hopes the US ban on beef imports from Brazil will soon be lifted, but added it ''will be a challenge for our commercial team to work together in this [US] market''. 

USCA's Peterson said: ''Not only will this move increase consolidation of meat processors on a global level, but Brazil is simply a bad actor in the global marketplace. 

''Our concerns lie with their intentions following the acquisition – is Marfrig trying to circumvent the current ban the US has placed on Brazilian beef imports to take advantage of the US cattle and consumer marketplace?"

Secco explained the reasoning behind Marfrig's National Beef acquisition was to focus the business on its ''core beef category'' and has therefore adjusted its strategy, which includes reducing its leverage to ''low'' levels as a key part. 

To that end, the Brazilian firm put its Keystone division up for sale and has engaged JPMorgan and Rabobank to oversee the disposal. 

The decision may have surprised market watchers somewhat, only three years down the line from when Marfrig sold its meat and prepared food business Moy Park to JBS in order to expand Keystone in the US and Asia. 

Funds raised from the sale of Keystone will be used to pay off a $900m bridge loan taken out to partly finance the 51% stake in National Beef, which Marfrig obtained along with a $100m loan expiring in 2022.

The National Beef transaction, plus the sale of Keystone, should help Marfrig to achieve its goal of reaching a leverage ratio of 2.5 times by the end of 2018, the company said.  

That ratio stood at 4.55 times at the end of 2017, and is projected to fall to 3.35 times once the National Beef deal is complete.

"The acquisition of National Beef reflects our sustainable growth strategy," Marcos Molina, Marfrig's chairman, said. "From now on, we have become the Brazilian company of the sector with the best financial health, proved into the lowest rates of leverage." 

With respect to shareholdings, National Beef had been 79%-owned by holding company Leucadia National Corporation since 2011.

Under the terms of the new deal, Marfrig said in a statement announcing the deal that Leucadia would ''transfer'' its ownership to the Brazilian firm but would retain a 31% interest. US Premium Beef, an association of US producers, will hold 15% and ''other'' investors 3%. 

On Monday, Leucadia, the parent of US investment bank Jefferies Group, said it was selling its remaining 48% stake in National Beef to Marfrig for about $900m in cash.  

CEO Secco acknowledged there would be challenges to overcome in the transitional phase, with the need for the combined teams to focus on ''important topics'' such as operational efficiency; commercial destinations; the level of production; integration with farmers; adding value to products; foodservice; and e-commerce such as in China. 

Meanwhile, OCM urged the US Department of Agriculture to flex its muscles to protect North American meat farmers. 

"Coupled with the lax US meat import policies, which allow imported foreign meat to be labelled as 'Product of the U.S.A.', this will surely guarantee the demise of America's cattle producers,'' the anti-trust body said. "OCM calls on USDA to immediately change the labelling policy of imported beef."