Investors Are Skeptical About Brazil’s Big BRF-Marfrig Deal

(Bloomberg) -- The surprising announcement that Brazil chicken producer BRF SA is in talks to take over beef giant Marfrig Global Foods SA was met with mixed responses from analysts. Investors didn’t seem too excited either, with moves on the stocks somewhat muted as the expected reduction in the debt burden at the resulting company is met with uncertainties about scale gains and corporate governance.

BRF fell 1.2% at 11:23 a.m. in Sao Paulo, while Marfrig rose 3.1%. Competitor JBS SA dropped 2.8%.

The all-stock transaction would increase BRF’s geographic and product diversification and allow the firm to reduce leverage, a key investor concern. Still, there are doubts on the control structure of the new company and how much it will be able to extract in terms of synergies.

“Financial logic seems greater than operational logic for a combination,” Goldman Sachs analysts led by Luca Cipiccia said in a report.

Here’s what Wall Street analysts have to say:

Thiago Duarte, BTG Pactual

• More diverse portfolio of products and geographies should allow for a strong reduction in debt costs and liability management
• Already rich multiples for the new firm may continue as it would benefit from a better risk profile
• Still, potential operational synergies between pork/poultry and beef are limited, as demonstrated by other companies’ experience including JBS
• "While BRF and Marfrig do look stronger together – the reason we believe investors will welcome the transaction – we’d still be conservative on synergies, even more in light of what we see as a rich combined valuation and significant execution and integration risks"

Benjamin Theurer, Barclays

• Combination would generate synergies, reduce geopolitical risks, allow for a lower cost of capital and should drive returns for shareholders of both companies
  • “Combining chicken and beef assets could bring margin stability to the combined business and, considering BRF’s strong position in the Halal markets as well as MRFG’s strong position in beef in the U.S., expose the combined company to markets with strong demand and allow it to further leverage its combined Brazilian operation for international exports”
• Combination would be in the interest of shareholders of both companies
• Overweight rating for BRF, underweight for Marfrig

Leandro Fontanesi, Bradesco BBI

• Merger ratios imply a valuation about in line with current stock prices, which means minority holders should equally benefit from synergies
• Potential benefits of the deal include de-risking BRF’s balance sheet, while increasing protein and geographic diversification
• “We would like to confirm whether BRF’s diffuse control structure would prevail”
• BRF maintained at outperform, top pick in sector

Luca Cipiccia, Goldman Sachs

• Combination with Marfrig would give BRF greater scale but different geographic and product mix
• Transaction “could generate additional savings from a reduction in the cost of debt”
• Uncertainty on whether deal with be concluded should lead to mixed reaction
  • Investors may see “strategic merit from the potential transaction and benefit for the combined leverage profile, but may at the same time be concerned about BRF’s strategic focus at a time when management is already focusing on profitability in Brazil”
• “Investors may also see a risk to combined margins from adding a lower margin and more cyclical business to the company’s portfolio, noting that the company already participated once in the beef segment in Brazil but exited it in 2014”
• Buy rating for BRF

Diana Stuhlberger, Eleven Financial

• Combination “should allow them to reduce leverage and to benefit from new market opportunities”
  • On the other hand, “merger is quite complex given their sizes"
• “I don’t know if the timing was right, as both firms are going through a restructuring process”

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

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Julia Leite

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