February 13, 2012

 

JBS to split dairy unit to spur growth

 

 

The world's largest beef producer JBS plans to spin off its dairy division - Vigor Alimentos, in an effort to boost the company's growth prospect.

 

The Brazilian group invited its investors to swap JBS stock for shares in Vigor Alimentos, in proportion to the companies' values, which will be set at a later date.

 

Vigor is to be floated, "with its own corporate structure", on Sao Paulo's Novo Mercado market, a move which implies that at least 25% of the shares must be available to the public.

 

However, while five of its seven directors will be independent, it will be chaired by Wesley Batista, the JBS chief executive, with his brother Joesley Batista, the JBS chairman, also on the board.

 

Gilberto Xando, a former Sadia manager and Cooper & Lybrand employee, will remain chief executive.

 

The move will open Vigor to a higher stockmarket rating than its parent company, given the higher multiples that milk groups trade on, JBS said.

 

"Because Vigor is a wholly-owned subsidiary, and not an independent company, the market may not perceive the real value of Vigor within [JBS's] assets," JBS said.

 

"The dairy industry customarily has higher trading multiples than those of the meat processing industry."

 

The spin-off will also give Vigor, as an independent company, more elbow room for deals, enabling "higher visibility and flexibility for potential strategic moves".

 

Wesley Batista in November highlighted JBS's desire to "increase [its] presence" this year in dairy, a sector offering "significant opportunities".

 

However, the company, which ran up sizeable debts on a spree of acquisitions in the end of the last decade, culminating in the purchases of Pilgrim's Pride and Bertin, has seen efforts to strengthen its credit rating hampered by disappointing results.

 

Both Moody's and Standard & Poor's late last year trimmed their outlooks on their credit rating for JBS from "positive" to "stable", with Fitch warning two weeks ago that "continued underperformance during the next two quarters could lead to a ratings downgrade".

 

JBS will need consent from some bondholders for the spin-off.

 

Brazil's dairy market is seen as particularly promising, facing growth not just from a rising population and increasing wealth, but also from an expansion in urban dwellers, who tend to consume more dairy products.

 

Vigor, which employs 3,300 staff, claimed sales of more than BRL$1.2 billion (US$696 million) last year, nearly two-thirds in the state of San Paulo.

 

Its dairies and cheese divisions grew sales twice as fast as the sector average last year, to lift their market shares to 6.1% and 13.9% respectively, according to JBS data.

 

JBS shares closed 2.0% higher at BRL$7.13 (US$4.13) in San Paulo.