Deal Skepticism Unleashes World-Beating Meat Rally for BRF

(Bloomberg) -- Rising doubt that its proposed tie-up with Marfrig Global Foods SA will actually happen is helping turn chicken producer BRF SA into the world’s best-performing major meat stock.

When the two Brazilian companies surprised investors in late May by saying they were exploring a merger, BRF shares sank. But the initial selloff wasn’t driven by typical deal logic that a buyer’s stock price falls and a target’s rises. Rather, investors were concerned about the ownership structure of the new company and how much value would be extracted given beef producer Marfrig’s poor results and thin industry margins.

Then BRF shares took off. They are now up 17% since talks were made public. That’s the best performance among major meat processing stocks tracked by Bloomberg. In the same span, Marfrig is down about 3%.

Behind the turnaround is the notion that BRF will face an uphill battle convincing its shareholders that the scale gains of buying Marfrig are worthwhile. As perceived risks of the deal failing grows, investors have focused on how much BRF stands to benefit from booming protein demand due to an outbreak of African swine fever in China.

“The market has become skeptical,” Diana Stuhlberger, an analyst at Eleven Financial Research, who has the equivalent of a hold recommendation on BRF shares, said by telephone. “I haven’t incorporated it into BRF’s estimates.”

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BRF’s rally means Sao Paulo-based Marfrig is trading near the cheapest relative to its would-be acquirer since early 2018. The outperformance also means BRF would have more than 87% of the combined value of the two companies, up from the 85% share outlined in the proposed tie-up.

The all-stock transaction would create the fourth-largest meat company in the world by sales, increasing BRF’s geographic and product diversification and allowing the firm to reduce leverage, a key investor concern.

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Studies about the benefits of a transaction with Marfrig are still being conducted, with a final decision on the deal subject to further assessments by the two boards, BRF said in response to questions.

“The important thing for us is to have clarity that the strategic goal of strengthening both companies will be met with the proposed merger,” the company said.

Marfrig declined to comment.

To contact the reporters on this story: Gerson Freitas Jr. in São Paulo at gfreitasjr@bloomberg.net;Vinícius Andrade in São Paulo at vandrade3@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, Steven Frank

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