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Exotix says JBS weathered the crisis; public offering possible

The Chinese symbol for crisis is made up of symbols for both danger and opportunity.

And the Brazilian meat packing giant JBS S.A. has certainly been in a crisis during most of 2017, but an investment banker with expertise in emerging markets says there is an opportunity now in JBS, especially in acquiring its bonds.

The frontier markets firm, Exotix, says JBS is “a food giant that has weathered the crisis.”

The company, headed for the first time by someone who is not a member of the Batista family, is calling the Oct. 13 withdrawal of its filing of an initial public offering with the U.S. Securities and Exchange Commission merely a “procedural matter,” suggesting  it might still spin-off its North American holdings into a separate company as was planned.

The Batista family still owns about 40 percent of JBS S.A., but brothers Wesley and Joesley Batista, respectively the previous chief executive and chairman of JBS, were forced to step down from their company positions after they were jailed on charges of insider trading. The charges were part a plea bargain the brothers negotiated in May. They provided evidence showing Brazil President Michel Temer, and other top politicians, were on the receiving end of meat industry bribes.

Before that scandal became public knowledge, prosecutors say the brothers sold some JBS shares and made some foreign currency transactions that ended in dollar holdings. They are accused of  pocketing $100 million from the trades. Their  defense is going to argue that the transactions were routine and that currency trades are standard practice for their international business.

If convicted, the billionaire brothers could face prison time.

The Batistas’ plea bargain agreement, known in Brazil as a leniency deal, won partial approval from a federal judge. They’ve agreed to pay millions in fines.

With the brothers out of the executive suite, Jeremiah O‘Callaghan was elected chairman by a JBS board that has been infused with new directors intent on seeing the world’s second largest food company move beyond the incidents of bribery and corruption.

O‘Callaghan was, for the past decade, investor relations director for JBS. Global advisor Tarek Farahat was briefly chairman. He moves over Pilgrim’s Pride, the JBS USA poultry subsidiary based in Greeley, CO.

“JBS is the ‘granddaddy’ of the Brazilian meatpacking and food companies, the second-largest food company in the world, and the global leader in animal protein,” according to the Exotic market report. For most of the first half of this year, and until very recently, the company was the subject of several negative events that caused the price of its bonds to drop substantially — from close to par to the mid-80s in some cases back in June.

“The bond prices have recovered to their ‘normal’ trading levels of par or slightly above par as the company has established a series of controls and put together a strict compliance policy, while making important changes in top management.

“Still, at this point, trading levels remain below their 52-week highs — in or around March of this year — suggesting to us that there might still be room for slight price appreciation. However, our recommendation is based on what we consider an attractive carry given the quality and the competitive advantages over its peers.”

Al Almanza

Also, the company might revive its planned $500 million initial public offering in 2018 for JBS Foods International, according to published reports.

JBS is a top producer of beef, pork and lamb in the U.S. In the run-up for its expected IPO, the corporation’s leadership named Al Almanza, who formerly headed USDA’s Food Safety and Inspection Service, as its leader of worldwide food safety.

Exotix likes “the JBS family of bonds,” which “should be trading at even higher levels, in our view.” It profiles JBS S.A. as follows:

  • JBS is a global food industry leader which employs more than 235,000 people globally and operates production facilities and commercial offices in more than 20 countries.
  • JBS is the second-largest food company in the world, according to Bloomberg rankings, the global leader in beef production, leather processing and chicken production, and the number two company in pork and lamb production in the world.
  • The company has operations in Brazil, Mexico, the United States, Canada, Europe and Oceania, and sales on every continent. It began as a Brazilian beef producer. Since 2006, through levered buyouts and organic growth, it has become a global food enterprise.
  • Although food is its core business, the company also operates in the leather, biodiesel, collagen, soaps, glycerine, and natural casings sectors and owns waste management, metal packaging and shipping businesses which support its operations.
  • The group has well-developed brands with wide recognition in its areas of operations such as Seara, Swift, Friboi, Doriana, Moy Park, Pilgrim’s Pride, and Pierce, among others. The company has approximately 300,000 customers worldwide and is present in more than 150 countries.
  • The company generated revenues of $50.234 billion U.S. in the past 12 months (LTM) ended Q2 17, as well as $3.762 billion U.S. in EBITDA in the period.
  • In addition, JBS is one of Brazil’s largest exporters with $3.682 billion U.S. in exports during Q2 17 to China (20.0 percent), The Middle East and Africa (13.9 percent), Japan (12.3 percent), the United States (9.5 percent ), South Korea (7.7 percent), the European Union (6.5 percent ), Mexico (6.4 percent ), Russia (4.7 percent), South America (ex-Brazil) with 4.0 percent, Canada (3.2 percent), and other countries (11.9 percent).

Brazil’s investigations, however, were still up-ending JBS as recently as last week when tax questions forced the temporary closure of  seven slaughterhouses in Mato Grosso do Sul, Barzil, over a  court freeze of $229 million in assets. Operations resumed at the facilities Saturday.

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