A Brazilian Billionaire and Business Guru Faces Humbling Ouster

(Bloomberg) -- At 81, Abilio Diniz is practically a legend in Brazil. Billionaire. Business guru. Author of two best-selling autobiographies. He’s even got more than 1 million Facebook followers.

Yet Diniz is now close to getting ousted as chairman of Brazil poultry giant BRF SA, an embarrassing spectacle for a man once hailed for his management acumen. He was named chairman five years ago, pledging to make the $7.4 billion food giant leaner and more profitable. But after a series of questionable moves and invigorated competition, BRF is today losing money, and investors are seeking to fire him and the rest of the board.

BRF’s turmoil is the latest in a series of corporate crises erupting in Latin America’s largest economy, from powerhouses Petrobras SA to JBS SA, that have made investors increasingly sensitive to corporate governance issues. Under Diniz, BRF replaced its entire management twice.

“Diniz just put in a bunch of financial yuppies to run the company,” Joao Lian, a vice president at Brazil minority shareholders group Aidmin and a BRF shareholder, said in a phone interview.

The tycoon’s fate is likely to be discussed at a board meeting Monday, but major shareholders are already lining up potential director replacements. He owns less than 4 percent of BRF and has lost support among investors, including Aberdeen Asset Management. Even long-time ally Tarpon Investimentos SA, the company’s third-largest holder, is participating in talks for the formation of a new board that does not include Diniz, a person with direct knowledge of the matter said, asking not to be identified discussing private information.

Diniz didn’t respond to a request for comment.

Diniz went to work for his father after college, turning the family bakery into Brazil’s biggest retailer, Cia. Brasileira de Distribuicao, known as Pao de Acucar. Along the way, he built a fortune now estimated at $3.4 billion and constructed a reputation as one of Brazil’s business greats. But his decades-long career was tarnished when he was forced out of Pao de Acucar in 2013 after a fight with French supermarket chain Casino Guichard-Perrachon SA.

That same year, he took over as chairman of BRF, supported by Tarpon and pension fund Previ, Brazil’s largest pension fund and the second top shareholder.

Diniz implemented a radical restructuring and promised to boost the stock of the world’s third-largest chicken producer. BRF, he once said, had always been a fairly good business, but it could be great. Under his strategy, BRF would shift towards a more consumer-led business from an industrial-based one that relied on commodities.

Annual Loss

Almost five years later, BRF is by any means far from great. The company just reported its largest-ever annual loss, the second in a row, sending shares tumbling to the lowest level since 2012. Debt ballooned, and the company is now close to being cut to junk by S&P Global Ratings. As a result, investors led by pension funds Previ and Petros called for a shareholder meeting aimed at replacing Diniz and the entire board. No date has been set.

BRF’s troubles can be traced back to a series of ill-advised management and personnel moves Diniz made, according to analysts and investors.

Diniz is frequently quoted as saying success is achieved when you “place the right people in the right places.” He’s had trouble doing that. BRF has had four different executives in the top spot, in addition to replacing its entire management twice. Plus, many of the new executives hired had far less industry knowledge than those they replaced.  

Only a few months after taking over, Diniz named Claudio Galeazzi, a consultant and turnaround expert, as CEO, to replace Antonio Fay, who had spent two decades in the food industry. In 2015, Galeazzi was replaced by Pedro Faria -- a founder of Tarpon Investimentos. After a string of poor results, Faria was eventually replaced by Jose Drummond Jr. in December.

The managers originally named by Diniz cut thousands of jobs and significantly reduced BRF’s sales force, eventually hurting the company’s ability to reach customers, according to an HSBC report. It reduced the purchase of chicken and hogs under long-term supply arrangements, making it more vulnerable to the usual ups and downs in commodity prices. Top managers’ pay doubled since then.

"Execution was the main culprit," said Peter Taylor, a senior investment manager at Aberdeen Asset Management PLC, who supports Diniz’s removal.

External factors beyond Diniz’s control also played a part in BRF’s troubles. Those include a worst-in-a-century recession in its home country, a surge in domestic corn prices after a drought-sagged harvest and a major food-safety scandal. Also, JBS, the company controlled by beef tycoons Wesley and Joesley Batista, became a major rival after acquiring foodmaker Seara in 2013.

Profit Margins

As a result, BRF’s share in the domestic market for branded, processed food -- Diniz’s biggest bet -- fell almost five percentage points in 2016, with profit margins in the segment falling as well. The share has since recovered to 59.5 percent after JBS became embroiled in a corruption scandal triggered by the Batista brothers, but it is still below previous levels.

BRF’s struggle may also stem from a lack of consensus among big shareholders on the company’s strategy, said Gilberto Braga, a corporate governance specialist. While BRF is broadly held, its largest shareholders often form alliances to impose its vision, acting like controlling shareholders. But they too often pushed differing strategies, he said.

"BRF shareholders apparently don’t speak the same language," Braga said.

--With assistance from Fabiola Moura

To contact the reporters on this story: Gerson Freitas Jr. in São Paulo at gfreitasjr@bloomberg.net, Tatiana Freitas in São Paulo at tfreitas4@bloomberg.net.

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, David Papadopoulos at papadopoulos@bloomberg.net, Larry Reibstein, Melinda Grenier

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