Sep 4, 2009


Target of opportunity


The first time I spoke with Wesley Batista at JBS headquarters in Greeley, CO, he told me that they were contrarians and opportunistic.

When everyone wants out of a business, they want in. His family showed those cards again last week, making a bid to buy Pilgrim’s Pride poultry which has been entangled in bankruptcy for the past year. Pilgrim’s Pride was one of the meat processing companies that got hung out to dry by buying too much high-priced corn last year. Many others endured by not buying too much of their corn needs when commodity prices were high. Pilgrim’s Pride also had a lot of debt at that time. It was a big surprise to see these guys at JBS SA enter the chicken business, but at the end of the day, it could fold in very well with their current meat business. JBS announced last month that they were going to raise more capital with an initial public offering of $2 billion worth of stock to be traded on the New York Stock Exchange to fund their continued growth. It appears that they will not be waiting around for the stock sale before they embark on their expansion plans.

JBS SA is on a fast track. In just the last month, they announced that they were going to start up a leather company in Brazil, then they announced they were going to expand one of their hog operations in Butchertown, KY. They are in the process of upgrading several of their feedlots, and now they are adding chicken to their portfolio.

The word is that they will get Pilgrim’s Pride bought for about $2.5 billion. The company had over $8.5 billion in sales during 2009. In 2007, JBS bought Swift for just $225 million cash and assumed $1.23 billion in debt. In 2007, Swift had $9.52 billion gross earnings, but lost money for three consecutive years before they sold to JBS. JBS’ U.S. operation, which includes its Australian interests, earned $60 million during the first quarter of 2009 and $104.6 million in the second quarter on beef sales only. Clearly, these guys know the meat business and how to make a buck at it. Worldwide, their operations returned a gross margin of around 10 percent, which is mighty good for the meat packing business.

The Wall Street Journal carried this story on the front page last Thursday, but seemed to be more concerned about how the Justice Department might look at the acquisition. I would have to assume that there wouldn’t be much for them to look at since chicken is an entirely different business, but this buy would give them equal market share with Tyson in the chicken business at 22 percent each. JBS gained experience with the U.S. Justice Department when they attempted to purchase National Beef. The only thing I could possibly see getting in the way is some misconstrued competition issue that our new friend Dudley Butler in Grain Inspection Packers and Stock Yards Administration would conjure up. His agency wouldn’t have anything to do with the poultry business directly, but he could sure lay a road map out for Justice to follow. Butler earned his wings suing poultry processors over contract issues in his early days as an attorney.

This acquisition would certainly put JBS in a powerful global position in the meat business. The idea of providing customers with four protein choices under one roof has some appeal.

And, the real synergy would be that one distribution chain could offer opportunity for the other meats. Another positive aspect of JBS getting in the poultry business is that chicken is still on a growth trend, with U.S. consumers chomping down about 70 pounds of chicken a year. JBS, in a little over two years, has become one of the big dogs in the meat business in the U.S. and worldwide. Tyson would be the only other company that would be processing and producing hogs, chickens and cattle, but JBS will also have a spot in the lamb market, perhaps less important in the U.S. markets, but very important in Australia and Muslim countries.

This company is on a roll, but also highly leveraged in an industry that typically offers small margins on sales. These guys have big plans and it doesn’t appear they are ready to slow down their acquisitions. They clearly see many ways to add value to livestock and meat processing. At this point, I wouldn’t be surprised to see them buy a few fish farms. — PETE CROW