There will be mergers and rumors of mergers and there will be
corporate failures and name brands disappearing - for many of
Brazil's heavy-hitting food companies, these are indeed the end
times.
Beef companies Independencia and Arantes have defaulted on debt
payments and filed for credit protection recently. Brazil's No. 2
beef exporter, Bertin, could be next, according to Moody's.
In the sugar market, which Brazil dominates globally, big names
are acquiring weaker ones. Like their peers in the meat markets,
companies were over-leveraged at a time when credit around the
world has just run dry. Add a global recession to the mix, and
demand for the very products these companies churn out has
deflated.
"The market is definitely punishing the entire sector," said
Bruno Lima, an equities analyst at Rio de Janeiro-based Mercatto
investments.
It's a sharp contrast from the 2006 to the mid-2008 period. Back
then, demand for the food and commodities produced by publicly
traded Brazilian-owned companies, whether chicken or sugar, was sky
high. Margins were tight in some cases, but the biggest problem
facing Brazilian food companies was whether the dollar was going to
weaken further against the Brazilian real, reducing export revenue
for companies that sell at least 50% of their goods abroad.
The dollar was as low as BRL1.56 to the real in July, weakening
consistently over the last three years. It has since bounced back
to a range of BRL2.25 to BRL2.30, but that hasn't helped much. Beef
exports on the year are down 8.9% in volume and 22.8% in revenue in
February, according to Trade Ministry data. Chicken exports are off
6%, with revenue down 26.3%. Ethanol, a major component of sugar
companies' bottom lines, is down 65% in volume and 63% in revenue
in February.
March hasn't started off any better, with beef sales down 1% in
the first week of the month compared to the same period in
February. Sugar sales are down 18.8% over the same period.
Last year, Brazilian food companies were busy investing in
expansion projects locally and globally.
Sadia (SDA) finished building its first overseas meat packing
plant in Russia. JBS (JBSS3.BR) acquired Australian and U.S. meat
companies, making it the largest company of its kind in the
world.
Those were the good old days.
Today, Brazil's second-largest sugar company, Santelisa Vale, is
in dire financial straits and looking to be acquired, according to
executives who could not comment on the record. Its chief executive
officer, Anselmo Rodrigues, recently left the helm of Santelisa's
ethanol joint venture with Goldman Sachs (GS) and Carlyle
Riverstone.
Last Friday, leading sugar company Cosan Ltd. (CZZ) agreed to
buy rival Nova America (NOVA3B.SI), owners of the leading sugar
brand in the country.
The same day, Moody's downgraded Sadia's debt to B2 from B1,
five levels below investment grade.
"Sadia's credit outlook is definitely negative," said Suommo
Mukherjee, an analyst at Moody's in Sao Paulo. "They really rely on
capital injection or selling assets because the company is cash
flow negative and loaded with unsustainable short term debt."
Sadia's total debt, including off-balance-sheet debt, is
estimated to be 5.4 billion Brazilian reals, or $2.38 billion. Its
enterprise value is around BRL7.2 billion, according to Renato
Prado, an equity analyst at Banco Fator of Sao Paulo.
Short-term loans of BRL1.5 billion are coming due in September,
according to Moody's.
"The main problem with Sadia, like all companies across the food
segment, is international demand. Local demand is okay. But when
50% of your revenue comes from exports and those exports are in a
general decline because of a recession or because credit just isn't
there to buy, then it really hurts the revenue streams of all these
players," Prado said.
This week, newsmagazine Veja said that Sadia and its rival
Perdigao (PDA) were in merger talks. Sadia had no comment about the
report. It tried to acquire Perdigao two years ago in a failed bid
but today it needs Perdigao more than Perdigao needs Sadia, said
Mercatto's Lima.
In New York, Sadia's American Depositary Receipts are up 6.2% to
$3.78. Perdigao is up 3.6% to $26.69. The company's enterprise
value is around BRL8.2 billion, with just BRL2.6 billion in short
and long-term debt obligations, according to Prado.
"The only names we like in this sector right now are Perdigao
and Marfrig (MRFG3.BR)," said Lima. "Both companies have great,
trustworthy management."
Marfrig is one of Brazil's top three beef exporters. Its shares
are down 10% since January, while the general Ibovespa stock index
is up 5.6%. Rival JBS is down 5.7%.
In the long term, the industry's prospects are still good. "The
outlook is still positive," said Lima. "Despite the credit crisis,
people still need to eat."
-By Kenneth Rapoza, Dow Jones Newswires, 5511-2847-4541,
kenneth.rapoza@dowjones.com