Marfrig Surges as Brazilian Beef Giant Boosts Bet on U.S. Market

(Bloomberg) -- Equity investors are applauding Marfrig Global Foods SA’s return to deal making as the second-largest
beef producer shells out $849 million to increase its stake in National Beef. Bondholders are less enthused.

Marfrig shares rose as much as 6.1% Monday after the Sao Paulo-based company agreed to buy Jefferies Financial Group’s remaining 31% stake in Kansas City-based National Beef at a time of rising prices underpinned by strong U.S. demand and China’s battle to fill a protein gap created by African swine fever. The company’s bonds due 2026 slipped 0.4%. While the transaction will temporarily lift Marfrig’s net debt to 2.87 times earnings before items from 2.43, longer term it will help lower leverage by freeing up some of the cash used for dividends to Jefferies, Chief Executive Officer Eduardo Miron said on a call with investors.

The deal “should give Marfrig far more flexibility to manage its balance sheet and the massive cash flow National Beef is currently generating without the limitations imposed by the shareholder agreement and mandatory dividends that had to be paid out to minorities,” Thiago Duarte, an analyst from BTG Pactual, wrote Monday in a report. The bank increased its price target for Marfrig’s shares to 12 reais after the deal.

Marfrig shares, which have doubled this year, were up 5.6% at 1:05 p.m. in Sao Paulo. In July, the company’s proposed merger with fellow Brazilian protein supplier BRF SA was dropped by mutual agreement. Marfrig is controlled by its founder Marcos Molina.

While the deal’s initial bump to leverage may be a concern for the bond market, longer term the transaction puts Marfrig in a better position to access U.S. credit and pay lower rates, according to Soummo Mukherjee, an analyst at Lucror Analytics in Florida. The prospect of lower financial costs should help the company reach its long-term leverage goal of 2.5. “With the transaction, Marfrig eliminates Jefferies, a bank with a strategy and pressure for results different from the others shareholders,” Mukherjee said in a telephone interview. The remaining shareholders at National Beef are linked to the operation. “Any devaluation in bond prices is seen as an investment opportunity for us,” he said.

Marfrig’s investment appetite is being whet by record earnings as South American exports to China grow and amid rising cattle supplies and strong demand in the U.S. Executives said the favorable outlook will continue in 2020.


By Tatiana Freitas and Vinícius Andrade