The Progressive Farmer: The Market’s Fine Print – The JBS Decade
John Harrington, DTN Livestock Analyst | 6/29/2017 | 9:03 AM CDT
From 2007 to 2017, JBS has spent more than $20 billion on roughly 22 different acquisitions. (Logo courtesy of JBS; DTN photo illustration by Nick Scalise)
Quicker than you could say “churrasco,” JBS USA became the third-largest beef and pork processor in the country.
Business reporters were initially tantalized by the boldness of the South American upstart for several reasons. First of all, the genesis of JBS (named for the initials of founder Jose Batista Sobrinho) had a storybook quality with a rags-to-riches narrative. Launched in 1953, Sobrinho’s vision was no more promising than a self-run butcher shop that killed no more than five cattle per day.
But his business began to expand when the establishment of Brazil’s new capital, Brasilia (i.e., dedicated April 21, 1960), brought a new market within reach of his ranch. Company growth through the balance of the century was gradual but tireless. By the year 2000, daily chain speed across the corporate network was estimated at 5,300 head.
By that time, JBS was ripe to think beyond the borders of Brazil. Indeed, in the first five years of the 21st century, the new high roller expanded operations to 21 plants in Brazil, and five in Argentina, increasing its daily slaughter capacity to 19,900 head. In 2005, the company acquired 100% of Swift-Armour, Argentina’s largest beef producer and exporter.
I suppose the American debut of JBS was also sexy in the way it promised critical rejuvenation for struggling beef processors and exporters. Even with the discovery of BSE in the state of Washington more than three years in the rearview mirror, exports were still running as much as 54% below pre-ban levels. Who better than an international rock star to help put foreign demand for U.S. product back in the groove?
Yet whatever enthusiasm was mustered in 2007 when JBS first waded into the vast sea of domestic beef production, it turned out to be faint praise indeed for the launching of an extraordinary season of corporate expansion, one that may never be repeated on the right side of the law. While most market watchers sincerely applauded the purchase of Swift & Company as an ambitious first trip through the buffet line, JBS insiders already sensed it was little more than light hors d’oeuvre.
Over the next decade, the acquisition team at JBS made drunken sailors look frugal. At times, the company’s appetite seemed boundless and its wallet appeared bottomless. Here’s just a short summary of the incredible spending spree: Smithfield Beef, Tasman Group in Australia, Five Rivers, Pilgrim’s Pride Corporation, XL Foods in Canada, Cargill’s pork division, Moy Park in the UK. Only the Department of Justice stepped forward in 2014 to check its insatiable hunger by insisting that it sell other beef plants before being allowed to purchase National Beef.
Before the sober day of reckoning was reached earlier this year, JBS had spent more than $20 billion on roughly 22 different acquisitions. I think we all scratched our heads at various times during that amazing decade of JBS dominance, asking, “Where do they keep getting the money?” Such non-ending leverage and rapid capital formation just seemed too good to be true.
As a massive corruption scandal has unfolded in recent months, we’ve learned it was.
Soon after JBS became a publicly held company in 2007, it received a major investment from BNDES (Brazilian Development Bank). Top company officials admitted last month to authorities that illegal payments collectively totaling millions of dollars were made to a number of Brazilian presidents. JBS bigwigs have accused Brazilian politicians of demanding bribes “in exchange for financing from state banks and favorable regulatory actions.”
Looks like a circular firing squad to me.
Brazilian judges must agree, given the record-setting 10.3 billion real ($3.2 billion) fine assessed to the company for its role in corruption scandals. Furthermore, JBS executives more frankly confessed that they spent as much as 600 million reals to bribe nearly 1,900 politicians in recent years. I’ve heard of greasing the wheels, but this sounds more like a BP oil spill.
Just as big parties typically lead to big hangovers, JBS must now pay the price for living beyond its legal means. With the company’s shares and bonds plunging, the board plans to divest about 6 billion reals ($1.8 billion) of assets, including stakes in a Brazilian dairy supplier, a U.K. chicken producer and a large group of U.S. feedlots (i.e., Five Rivers).
Regarding the latter, Five Rivers has 11 feedlots in five states and one in Alberta, with a total one-time feeding capacity of 975,000 head. My guess is that it will be virtually impossible for JBS to find one buyer for the entire, sprawling package. Nevertheless, I can appreciate the decision to select this item among U.S. assets to sell. When it comes to profit-margin potential in the years to come, the ongoing reality of expanding livestock herds probably favors packing houses more than feeding operations.
If there’s anything close to a silver lining for JBS as its 10-year acquisition frenzy comes to an end, it may be that the court has given this bad boy 25 years to pay the fine in full. Those are pretty generous terms. I hope you’re not thinking what I’m thinking.