Chain Reaction Research Report JBS: Financial Restructuring Could Be Delayed Due to Serious Allegations
JBS (JBSAY) is the world’s largest meat company by revenues, capacity, and production including beef, poultry, lamb and pork. It is the largest beef exporter from Brazil. JBS sells its meat products under a range of brands including Swift, Friboi, Seara, Pilgrim’s Pride, Gold Kist Farms, Pierce, 1855, Primo, and Beehive. JBS has executed an aggressive acquisition strategy outside Brazil. As a result, it has high net debt and low equity valuation multiples and now the company lacks room for continued consolidation. Consequently, JBS planned an IPO in May or June 2017 of its activities outside Brazil. This planned IPO of JBS Foods International (JBSFI) represents 85 percent of JBS sales. Barclays PLC is lead underwriter.
- JBS corruption and a USD 3.16 billion leniency agreement by J&F are connected to financial and governance risks that may prevent the company from reaching its goals of reducing net debt and unlocking shareholder value.
- JBS conduct raises concerns over implementation of its Corporate Social Responsibility policies. Cattle ranching is a major driver of deforestation in Brazil. It has large a greenhouse gas emissions footprint requiring ambitious and transparent action to eradicate deforestation from JBS supply chains.
- JBS revenue and EBITDA may continue to be weak as many customers might be sensitive to ESG concerns like corruption, contamination, deforestation and slave labor allegations. Waitrose, McDonald’s and Domino’s Pizza Brazil already have reacted. Assuming 33 percent revenue-at-risk in Brazil (USD 2.4 billion), this could affect more than 10 percent of JBS’ market cap.
- International investors may be hesitant to invest in JBSFI IPO amid growing allegations. Investors increasingly have ESG and zero-deforestation policies in place. The current allegations and investigations create a climate in which an IPO can only occur with a large valuation discount versus peers. JBS USA bondholders and investors holding Pilgrim’s Pride shares might also divest.
- A risk of a larger-than-anticipated share-offering and/or low-priced divestments; both might dilute existing JBS equity. To decrease its 3.6X Q4 2016 net debt/EBITDA ratio to 2X, JBS needs its JBSFI IPO to exceed USD 6 billion, probably with a valuation discount in that IPO. JBS equity dilution would be 30 percent if JBS would reduce its stake in JBSFI to 50 percent. This dilution considers lower interest charges due to the JBSFI IPO proceeds. In an alternative scenario if JBS continues with its divestments, its dilution might then be 63 percent.
For more information, please contact Tim Steinweg.