April 20, 2009

Who laid low Brazil's Sadia: Blame it on Lehman

The former chief financial officer of Brazilian food giant Sadia SA (SDA) went from wunderkind to plaintiff in less than a year.

But it was all Lehman Brothers fault. They went bust at the wrong time, resulting in a stronger dollar worldwide just when Sadia was incredibly short.

On April 6, Sadia's controlling shareholders unanimously agreed to hold 39 year-old ex-CFO Adriano Lima Ferreira legally responsible for more that 600 million Brazilian reals (US$270.2 million) in losses from dollar futures contracts gone sour.

Sadia posted a BRL3.8 billion loss in 2008, its first ever after 65 years in business. Shareholders said Ferreira didn't warn the board about the company's overextended position.

Ferreira disagrees.

"The company is making me out to be a villain, and they have destroyed my image in the marketplace," he said.

Ferreira argues that the company's financial position was perfectly sound until mid-September, 2008, when Lehman Brothers Holdings Inc. (LEHMQ) collapsed. The ensuing tsunami washed over markets worldwide. The Brazilian real lost 29 percent of its value against the US dollar last year amid the market turmoil.

"I'm not the villain. I did what I was required to do under company policy. No one knew the dollar would strengthen the way it did and lead to those losses," he said.

Ferreira, with two newborn twin girls at home, has been unemployed since he was fired on Sept. 26. Two others left with him: Alvaro Ballejo, his department's director, and Walter Fontana Filho, who resigned from his post as chairman of the board. Fontana comes from the family that created Sadia in the 1940s.

Sadia is Brazil's sixth-largest exporter. As a brand, it is the equivalent of a Purdue Farms Inc. As an investment, Sadia's New York-traded shares have collapsed 72 percent since Sept. 25, making it one of Brazil's biggest victims of the financial crisis.

Ferreira started at Sadia in 2002, moving up to CFO four years later. In 2007, he was put in charge of corporate strategy and risk management, a new department. Much of the company's profit, 80 percent in some quarters, came from his department's investment strategy and not from selling frozen chicken, its mainstay.

"Sadia is no stranger to financial markets. It's got its own brokerage house. It operates practically as a bank and has the know-how," said Ferreira. "The shareholders weren't complaining when those dollar positions were profitable."

Ferreira added, "The probability of the dollar going the other way was remote."

But the other way it went.

Sadia's in-house policy stipulates that it can't have more than 7-1/2 months of export revenue in dollar futures positions with banks. Ferreira said he never ordered anyone to extend dollar risks beyond that. When Lehman Brothers went bankrupt, the dollar positions became more costly, shooting beyond the established limit.

Sadia said it will no longer talk about the subject until legal settlements are reached.

Ferreira started shorting the dollar in 2007 by following what was then market consensus that the US currency was bound to get weaker. In fact, the real went from BRL2.20 in October 2005 to BRL1.56 in July 2008. Sadia's dollar strategy worked wonders until banks started failing in the US.

Sadia lost around BRL600 million in dollar positions it had to liquidate immediately with major international banks and then, to add insult to injury, lost another BRL200 million in Lehman Brothers bonds. Nearly a billion more in dollar futures was liquidated over the next several months.

Since then, Sadia has undertaken something of an about-face. In 2007, Ferreira instigated an unsuccessful hostile takeover of rival Perdigao SA (PDA). Now, Sadia, saddled with nine class-action lawsuits in the US, is trying to convince Perdigao to keep it from going under by entering into a partnership agreement.

The New York fraud class-action suits all state that the company didn't disclose its overextended forex hedging risks.

"I didn't kill Sadia," Ferreira attests. "It will survive. Life goes on."

US$1 = BRL2.19 (as of April 20, 2009)