Kay’s Cuts: JBS is still under siege

Guest Author, 12/06/2017

A monthly column written exclusively for Beef Central by US beef industry analyst and commentator, Steve Kay, publisher of US Cattle Buyers Weekly.


Steve Kay

SHARES in global meat processor JBS SA have fallen as I write this Friday morning (US time) on reports that it is being targeted by a Brazilian federal police raid.

According to a report by Brazil’s Veja news magazine, federal police agents raided the headquarters of JBS and of FB Participações, another company controlled by the Batista family. Neither the federal police nor JBS had immediate comment.

The crisis for the Batistas and indirectly for JBS thus seems far from over.

The bribery scandal has engulfed the family and has already cost them dearly. Beef Central has extensively covered developments to date. But it’s worth summarising key events as part of looking at the broader implications for JBS’s global operations.

The Batista family’s J&F Investimentos, JBS’s controlling shareholder with 42 percent of the stock, has agreed to pay a 10.3 billion real fine over 25 years. That represents 5pc of J&F’s total revenue from JBS and all other businesses it has stakes in. Reports say this might increase to 20 billion reals because the figure is inflation-indexed. J&F also agrees to invest 2.3 billion reals in social projects related to education and other areas to be suggested by the Federal Public Prosecutor’s Office.

A Brazilian federal court issues an injunction to freeze 800 million reals in bank accounts belonging to Joesley Batista. The federal court said the frozen funds may be used to repay allegedly ill-gotten gains in the foreign currency market one day before the May 17 disclosure that Batista had reached a plea bargain with prosecutors. Brazilian securities watchdog CVM is probing the transactions and says it will carry out its investigation as quickly as possible.

The plea bargain, which included Wesley Batista, kept the two brothers out of prison as prosecutors agreed not to file charges over their years of bribing officials. But they still face the allegation that JBS made suspicious trades that exhibit signs of possible insider trading. JBS’s only statement on the matter, on May 19, was that any trades made that week were consistent with its strategy of hedging its large (US) dollar-denominated debt.

Ill-fated foray into Argentina

Another consequence of the scandal was that JBS agreed to sell nine beef processing plants in Argentina, Paraguay and Uruguay to rival Brazilian processor Minerva SA for US $300 million. JBS says it intends to use the proceeds from the sale to reduce its financial leverage.

The move is probably a relief for JBS, as its foray into Argentina was ill-fated. JBS acquired the Argentine plants between 2001 and 2005. But it struggled to operate them profitably, especially after then-president Cristina Fernandez implemented export quotas. JBS closed all but one plant in 2012.

Ironically, JBS’s 2005 offer to buy Swift Armour SA in Argentina appeared to begin the cycle of state funding and bribes. Brazil’s national development bank (BNDES) agreed to lend the company US$80 million and the Batistas allegedly paid 4pc of the value or US$3.2 million as a bribe to an associate of then BNDES president Guido Mantega. That’s what Joesley Batista told prosecutors.

JBS though, will remain by far the largest beef processor in Brazil, well ahead of Marfrig and Minerva. It will still have 36 plants in Brazil with a combined 34,600 head of daily capacity. The company however will have to convince cattle producers to sell them cattle on credit, the way in which it previously bought its cattle, rather than on strictly cash terms.

The company will also have to repair relationships with its customers in Brazil. A slew of restaurants and supermarket chains have either stopped purchasing JBS products, or say they are considering doing so, reported the Wall Street Journal in its June 9 edition. And the Brazilian state-controlled oil company Petrobras cancelled a natural gas supply contract the day before that with a power plant owned by J&F. It cited the violation of an anti-bribery clause and said it seeks about US$21 million in redress.

Financial fallout

JBS itself has suffered some financial fallout, although it is unclear whether this will impact its ability to operate in Brazil or abroad for very long. US rating agencies Moody’s Investors Service and Fitch immediately downgraded their ratings of JBS and subsidiary JBS USA. This might make it harder for JBS to attract funding from other sources, at least in the short-term, because its reputation has been tarnished, say analysts.

JBS might find it more difficult to obtain financing in Brazil. But JBS said the leniency agreement with J&F agreement allows JBS and other companies in which J&F is a shareholder to negotiate and renew corporate loans with all Brazilian financial institutions, including publicly owned banks. So it might be “business as usual” in a few months.

The company might have to wait some time to launch an initial public offering (IPO) for JBS Foods International. JBS delayed the IPO and the unit’s listing on the New York Stock Exchange after the Weak Flesh allegations (relating to earlier bribery allegations about meat inspection practices) emerged, before the bribery scandal broke. JBS had hoped the IPO would raise about US $1 billion and help accelerate its expansion outside Brazil.

Assets not for sale

JBS’s largest business unit by far is JBS USA, which includes operations in Canada and Australia. JBS is the US’s second largest beef and pork processor and by far the largest cattle feeder. It is also the US’s second largest poultry processor, with 68pc ownership of Pilgrim’s Pride Corporation. It also agreed in March to acquire processed meats company Plumrose USA for US$230 million in a share transaction. JBS is also Canada’s second largest beef processor and Australia’s largest processor and cattle feeder.

JBS for now intends to keep all these assets and others, such as Moy Park in Northern Ireland. No core assets in the US or any other part of the world are candidates for sale, it said in a statement. It also noted that Pilgrim’s Pride is critical to JBS’s long-term strategy of pursuing business opportunities that reduce volatility and enhance margins. Beef and pork processing generate huge cash flows, so JBS USA division is likely to continue to operate normally. JBS though, is unlikely to seek further acquisitions in North America for a while.

Predictably, fringe producer group R-CALF USA has sent an 11-page letter to President Trump and other officials asking for a Justice Department investigation into JBS’s cattle procurement practices. R-CALF sought to portray JBS as only being able to enter the US business through graft and bribery.

It’s hard to imagine its allegations getting any traction. But this has already been a shock-filled year for JBS and the Batista family. So I’m not going to count out something else startling occurring.






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