SAO PAULO (Reuters) - JBS-Friboi (JBSS3.SA), Latin America’s biggest beef producer, said on Tuesday it would buy debt-laden meat packer Swift & Co. for about $225 million, expanding its reach into the lucrative U.S. and Asian markets.
The takeover of privately held Swift will create the world’s largest beef producer in terms of animals slaughtered, surpassing Tyson Foods Inc. (TSN.N) and Cargill Inc.
JBS-Friboi, which went public on Brazil’s Sao Paulo Stock Exchange only two months ago, will pay $225 million in cash and assume about $1.16 billion of Swift’s debt, giving the deal a total value of about $1.4 billion.
“What we see as important are the distribution channels Swift has, both in Japan and Korea and also in the United States,” JBS-Friboi’s chief executive, Joesley Mendonca Batista, said on a conference call.
JBS-Friboi and Swift last year slaughtered a total of 9.6 million head of cattle and had about $11.5 billion in total sales.
Swift is the No. 3 U.S. beef and pork processor.
Dallas-based HM Capital Partners LLC bought out Swift, largely a processor of fresh, unbranded meat, from packaged food company ConAgra Foods Inc. (CAG.N) in September 2002.
Swift, headquartered in Greeley, Colorado, has struggled with the loss of beef exports since late 2003, when the United States reported its first case of mad cow disease and Japan temporarily shut its borders to American beef.
Later losses came in 2006 when U.S. immigration agents raided the company’s plants as part of an identity-theft investigation involving immigrants.
For the third quarter to February 25, the company reported a loss of $48.57 million and sales of $2.09 billion, compared with a loss of $49.35 million, and sales of $2.24 billion in the year-ago period. It posted a loss of $129.55 million on sales of $9.35 billion in the fiscal year ended May 28, 2006.
Swift said in January that it had hired JPMorgan to assist in reviewing the company’s “strategic and financial alternatives,” prompted in part by unsolicited inquiries from a variety of third parties.
For JBS-Friboi, the deal marks the biggest in a series of acquisitions. The company started exporting fresh meat in 1997 and began its international expansion in 2005, when it bought Argentine meat processor Swift Armour for $200 million.
JBS-Friboi now has five plants in Argentina. Swift’s Australian unit is the biggest meat producer in that country.
JBS-Friboi was founded by Sobrinho brothers Jose Batista and Juvensor as a business buying cattle from farmers to resell to meatpackers. The brothers opened their own butcher shop in 1953 in the central state of Goias and later expanded through takeovers of several slaughterhouses in central Brazil.
The Swift acquisition is the latest in a string by Brazilian companies, such as iron ore miner CVRD VALE5.SA and steelmaker Gerdau (GGBR4.SA), which have made large international takeovers.
To finance the transaction, JBS-Friboi said it has lined up $700 million from a group of banks, although it won’t use all the funds immediately.
The Brazilian company will use $225 million to buy HM Capital’s stake in Swift and $175 million to pay down part of Swift’s debt.
Batista said Swift would also refinance part of its existing debt by selling $600 million of bonds “as soon as possible.”
JBS-Friboi slaughters about 22,600 head of cattle a day in 21 plants across eight states in Brazil and five plants in three provinces of Argentina.
JBS-Friboi and Swift said they would have a capacity to slaughter 47,100 cattle a day. That would top Tyson’s capacity of 37,100 and Cargill’s 36,000, according to industry sources.
Brazil’s beef exports surged 27 percent in 2006 from 2005 to $3.13 billion and reached $1.39 billion in 2007 through April, according to figures from the Brazilian Beef Export Industries Association.
The surge took place as the country struggled the past decade with outbreaks of foot-and-mouth disease that prompted dozens of countries, including the United States, to ban uncooked beef imports from Brazil.
Outbreaks have declined significantly in recent years under the government’s vaccination program, but countries such as Russia still limit purchases from some Brazilian states.
“In addition to the United States, Swift will give Friboi access to other NAFTA markets and some Asian countries, which stopped importing from Brazil due to foot-and-mouth disease,” said Fabiano Tito Rosa, beef analyst at Scot Consultoria in Bebedouro, Sao Paulo state.
JBS-Friboi plans to focus on improving Swift’s profit margins, Batista said.
The company expects Swift’s earnings before interest, taxes, depreciation and amortization, when calculated as a percentage of sales, to rise to between 3 percent and 5 percent from 0.4 percent in 2006.
“We believe this deal has a high turn around potential and this turn around is where we are specialists, which is the beef business,” Batista said.
Rothschild advised JBS-Friboi on the transaction.
JBS-Friboi’s shares rose 1.5 percent to 7.42 reais on the Sao Paulo Stock Exchange. The shares are down 7.25 percent from its IPO price of 8 reais.
Additional reporting by Marcelo Teixeira and Peter Blackburn