Bloomberg: The Dirty Family Secret in a Brazilian $20 Billion Buying Spree
by Gerson Freitas Jr, Tatiana Freitas, and Jeff Wilson
May 26, 2017
When beef tycoons Joesley and Wesley Batista sat down with Brazilian prosecutors last month and told them all they knew about the metastatic corruption scandal known as Carwash, they also let the world in on a dirty family secret.
The meteoric rise of the Batistas’ JBS SA, the global meat powerhouse that seemed to come out of nowhere a decade ago, wouldn’t have been possible without a top politician on the take, hundreds of millions of dollars in bribes and a series of sweetheart deals with Brazil’s state development bank.
“It wouldn’t have worked,” Joesley Batista told them, according to videos of his testimony. “It wouldn’t have been so fast.”
Not since a former oil executive-turned-state witness kicked off Carwash three years ago has testimony in the case been so explosive and threatened to do so much damage to Brazil’s economy and its political institutions. The fraud that the brothers described in at least seven hours of testimony is so pervasive that it has tipped Brazil back into political chaos less than a year after the nation’s last president was impeached.
In addition to handing over documents allegedly implicating more than 1,800 politicians in the scheme, the beef magnates also provided prosecutors with an audio recording in which President Michel Temer appears to be endorsing Joesley Batista’s payment of hush money to a jailed former lawmaker. S&P Global Ratings said May 22, five days after the testimony went public, that it may cut Brazil’s sovereign-credit rating even further into junk territory amid concern that the allegations put Temer’s ambitious reform agenda — and even his presidency — at risk. Temer has denied any wrongdoing.
The Batistas, led by the 45-year-old Joesley and older brother Wesley, shot into the global spotlight during the decade-long, $20 billion acquisition spree that turned their family-owned slaughterhouse into the world’s biggest meat producer. That the brothers are now poised to emerge from the Carwash scandal without facing any criminal charges is a testament to their near-preternatural acumen for bargaining. When the two Batistas approached Brazil’s prosecutor general last month offering to trade all the evidence they’d collected in exchange for immunity, the official had “no other alternative” but to give them what they wanted, he recently recalled.
The revelations raise questions about unfair competition abroad as the company gobbled up more than 40 rivals on four continents between 2007 and 2017. According to Joesley Batista, the state-development bank known as BNDES played a crucial role in JBS’s expansion in the U.S. The lender injected 5.6 billion reais (worth about $3.2 billion using the average exchange rate at the time) in capital for the acquisition of Swift & Co. in 2007, the beef-producing units of Smithfield Foods Inc. in 2008, and the chicken producer Pilgrim’s Pride Corp. in 2009.
In his testimony, Joesley Batista recounted how the decade-long scheme all started at a fateful 2005 meeting with Guido Mantega, who served as the president of BNDES from 2004 to 2006 before taking over as Brazil’s finance minister from 2006 to 2014. JBS was then just a privately held slaughterhouse, but it had ambitious plans to be much more. While other BNDES executives present at the meeting that took place at the bank’s Rio de Janeiro headquarters appeared skeptical, Mantega showed “strong” signs of support, Batista said.
Mantega’s lawyer didn’t respond to e-mail and phone requests for comment. BNDES’s press office and a JBS spokeswoman also didn’t respond to requests for comment.
With Mantega’s blessing, Batista alleged, JBS started looking for opportunities abroad. It quickly found one, and in September 2005 it made a $200 million offer to buy Swift Armour SA in Argentina. BNDES agreed to lend the company $80 million, and the Batistas allegedly paid 4 percent of the value, or $3.2 million, as a bribe to an associate of Mantega, Batista said.
Even with the bribe, Batista remembers thinking the terms of the loan were steep, but it was all they could get. “That’s what it took for us to get the deal done,” he told prosecutors.
The brothers claimed to have continued paying kickbacks to that associate until 2009, when they allegedly started negotiating directly with Mantega, Batista said. Overall, Batista said they paid $220 million in bribes, with most of the money being funneled into political campaigns. JBS and other companies under the umbrella of family holding company J&F Investimentos SA were the biggest campaign contributors in the 2014 elections, in which President Dilma Rousseff won her bid for a second term, according to Brazil’s electoral tribunal.
Despite the favorable treatment, JBS soon found itself overloaded with debt. Once again BNDES came to the rescue. In 2009, BNDES acquired 3.4 billion reais in local JBS notes that could be converted into stock of JBS USA, the American unit that the parent company planned to spin off in an initial public offering. When JBS failed to carry out the share sale, BNDES converted the debt into the Brazilian company’s shares, only it bought the stock at a premium that led to 267 million reais in losses for the bank, according to the nation’s audit court. The lender also let JBS off the hook for a 345 million-real penalty it was contractually obligated to pay.
JBS shares fell 2.2 percent to 8.03 reais as of 12:24 p.m. in Sao Paulo. The stock is down 15 percent since May 17, when the plea bargain deal signed by the Batista brothers became public, the biggest loss among global peers.
To many long-time Brazil watchers, the allegations are shocking but not altogether surprising. “In public financing, the ideal is to seek out companies that have a good prospect of generating developments inside the country and who can’t obtain funds in the private sector — neither was true for JBS,” said Sergio Lazzarini, a professor at Insper business school in Sao Paulo and co-author of “Reinventing State Capitalism” about the relationship between government and corporations in Brazil.
In an open letter last week, Joesley Batista said they were wrong to have participated in the scheme and apologized. “While we have explanations for what we did, we have no justification,” he said. Batista said Brazil’s “system” often creates barriers for businesses that want to carry transactions and because of that they opted to pay the bribes instead. “In other countries outside Brazil, we were able to expand our business without violating ethical values.”
Bill Bullard, the CEO of R-Calf, a cattle industry group in Billings, Montana, that’s long been critical of big meatpacking companies, recalls the raised eyebrows when JBS first broke into the market.
“Not only was JBS able to make purchases for loans secured with bribes, they were able to jump into the U.S. cattle market and outbid potential U.S. investors for these assets,” he said. “Through ill-gotten means, JBS has been able to gain control of a large portion of the U.S. cattle industry.”
In addition to copping to paying bribes for BNDES resources, Wesley Batista also admitted to paying kickbacks in return for tax breaks and said he’d provide evidence on alleged wrongdoing involving the nation’s food safety regulators. In March, JBS was roped into another investigation when one of its plants, along with 20 other meatpackers, were accused to bribing federal inspectors to approve the sale of tainted meat.