Tuesday, June 14, 2011

Brasil Foods : Suffering from turbulence

Brasil Foods is currently facing two major issues. The first is a rejection of the merger creating the company. The second is the ban of importing of Brazilian chicken into Russia. BRFS currently provids 40% of the chicken imported into Russia, and has a large presence in 40 other markets across the world.

Brasil Foods is currently facing regulator objection to the merger to create the larger company from the combination of Perdigao SA and Sadia SA. Apparently the Brazilian anti-trust regulator has rejected the merger for fear of price fixing in the domestic market do the potential dominance of the new firm on the basis of market share.

But the merger, arranged when Sadia had huge currency derivative contracts blow up on them for a $1B loss, was financed by the Brazilian government. So the same government that put up the money for the merger is now rejecting the combination. There are lots of variables on the motivation of the government, but what is obvious is that this merger is in line with the directive of the Brazilian government to create "national champions".

The regulatory finding is ... a rebuke to Brazil's strategy of using tax-payer money to form "national champion companies" that it hopes will project the country's rising economic power around the globe. Under an explicit strategy to bulk up Brazilian companies for global competition, Brazil's state development bank, BNDES, provided major financing to back the merger.
In fact, JBS, BRFS' main competitor, completed a similar deal last year between JBS SA and Bertin SA to create the world's biggest exporter of beef. The horse has left the barn, why try to close the gate now?

The author believes some compromise will be reached and the merger will go through with various concessions. It would be too painful to keep these companies after so much has been invested.

Regarding the Russian ban, a temporary affair. Russia has, without warning, banned Brazilian meat exports for periods of time on four different occasions in the last ten years. Each time, it has been proven that the "justification" for the ban was without merit. The author feels this will also be the case on this occasion.

The author still long BRFS.