The Chain: JBS Improving Its Governance and Cash Position While Brazil’s SEC Opens Case

Last week, JBS appointed Alfred “Al” Almanza as Global Head of Food Safety and Quality Assurance, reporting directly to JBS Global President of Operations Gilberto Tomazoni. From 2014 to 2016, Almanza was Deputy Undersecretary at U.S. Department of Agriculture Food Safety and Inspection Service under Secretary Tom Vilsack.

Almanza has a 40-year career as an expert on the food safety, risk management, the development of modern inspection systems and international sanitary systems and standards that enable market access for meat and poultry products. As Dallas District Office manager, he led a team of more than 7,000 FSIS field employees.

Almanza’s focus at JBS will be to enable JBS global operations to achieve and implement the highest food safety and quality control and risk management systems globally, to maintain and grow their export presence globally.

Almanza has a lot of work ahead of him.

JBS is facing numerous issues it needs to manage concurrently to maintain its position as the largest meatpacker globally.

  • On March 17, 2017, Brazilian federal police served court orders, warrants, and detention requests to JBS and BRF for allegedly bribing meat inspectors.
  • On March 21, 2017, Brazil’s environmental protection agency, IBAMA alleged JBS knowingly bought cattle that were raised on 200 square miles of illegally deforested land.
  • On May 12, 2017, the Brazilian Federal Audit Court (TCU) released an audit of alleged fraudinto Brazilian Development Bank (BNDES) loans used by JBS to finance its 2007 Swift & Company acquisition.
  • On May 26, 2017, JBS Chairman of the Board Joesley Batista resigned. Tarek Farahat was named the new JBS Chairman of the Board.
  • On May 31, J&F Investimentos agreed to pay USD 3.2 billion over 25-years following testimony by J&F owners Joesley and Wesley Batista that they spent about USD 185 million over several years to bribe nearly 1,900 politicians. The Batista family, via the holding company FB Participações, is the controlling shareholder of JBS. They own 42.3 percent while BNDES owns 21.3 percent.
  • On June 6, 2017, The Guardianreported that JBS allegedly paid about USD 3 million from 2013 to 2016 for cattle sourced from a farm in the state of Pará where Brazilian prosecutors in June 2016 uncovered laborers forced to work under inhumane and degrading conditions. The farm owner had also previously been fined USD 36 million for illegally deforesting an area of 33,000 hectares from 2012 to 2015.
  • On July 19, the Securities and Exchange Commission of Brazil (CVM) stated it had opened two probes into foreign exchange transactions by J&F Investimentos. It also stated that it was conducting 12 other investigations into alleged corporate wrong-doing by J&F controlled companies, including allegations of insider trading.
  • On August 3, President Temer barely survived a vote by the Brazil’s lower house of Congress 263 to 227 that would have given the okay for his prosecution for allegations that he received millions of dollars in bribes from JBS.

As a result, JBS USD one billion IPO scheduled for H1 2017 was delayed and JBS financial position has weakened. The Batistas have sold other assets to ensure financial stability for JBS and to pay for their legal settlements after they confessed to corporate crimes used to grow JBS globally, generating possibly over USD five billion from these sales.

  • On July 13, J&F Investimentos sold their 86 percent position in Alpargatas SA for USD 1.1 billion.
  • On July 25, JBS announced that its banks will allow it to roll over 90 percent of its USD 6.5 billion in notional debt for the next 12 months in exchange for amortizing 10 percent of this debt in four installments over the next 270 days. JBS also committed to apply 80 percent of its assets sales’ net proceeds to amortize debt.
  • On July 31, Minerva completed its USD 300 million purchase of JBS Paraguay, Frigorico Caneloness, JBS Argentina, and Industria Paraguaya Frigorifica pursuant to the share purchase and sale agreement executed on June 5, 2017 with JBS.
  • On August 2, JBS listed Pilgrim’s Pride reported stronger Q2 2017 earnings than expected. They reported adjust EBITDA 49 percent up year-over-year.
  • On August 4, J&F Investimentos agreed to sell Vigor Alimentos – its cheese and yogurt business – to Mexico’s Grupo Lala SAB. The deal is worth USD 1.8 billion. This sale has an exit multiple of 17.4X EV/EBITDA, which is very high. Lala entered into an agreement to buy 91.99 percent of Vigor from FB Participações and JBS. JBS had a 19 percent ownership position in Vigor.

Bloomberg reported August 4, 2017 (paywall):

“Lala paid a high ticket to enter Brazil’s large and growing dairy market,” JPMorgan Chase & Co. analysts led by Pedro Leduc wrote in a note to clients. “The move is transformational and buys a new growth vehicle, but also adds significant risk, dilutes EPS at first, and there are no obvious synergies.”

Finally, August 4, 2017, J&F Investimentos opened the bidding on its Eldorado pulp mill in Mato Grosso. The Batista family owns 81 percent of Eldorado. The bidding began last week after Chilean pulpmaker Empresas Copec’s bid to purchase Eldorado collapsed on Thursday August 3. Eldorado is one of the largest pulp mills globally.

From a deforestation risk point of view, Eldorado has obtained Forest Stewardship Council certification for its activities. The three remaining bids are from:

  • Asia Pulp & Paper
  • Asia Pacific Resources International Limited
  • Fibria, the largest eucalyptus producer globally

Eldorado’s enterprise value is estimated at USD 3.2 billion. Funds from this sale may help the Batista brothers pay their USD 3.2 billion legal settlement.

As these sales, mergers, and acquisitions proceed, it is unknown if the material sustainability commitments of these companies will be maintained by their new owners. Since March 17, JBS shares have decreased from USD 3.86 to USD 1.80 on June 20. Since then, as JBS has begun to address some of its governance risks while selling assets to improve its cash position, its share have climbed to USD 2.62 as of August 9. Beyond all the issues previously described, JBS is facing a need for corporate governance reform at the executive and board levels.

On August 8, according to Bloomberg (paywall), BNDES President Paulo Rabello de Castro stated that JBS’ is creating an executive committee to support a new company president.

It is not clear if Almanza’s mandate as global head of food safety and quality at JBS may also extend to deforestation and alleged bribery and corruption linkages as noted under the parent company J&F Investimentos. Almanza will require significant authority in his new role at JBS to ensure JBS corporate wrong-doing does not occur again.

The Chain Reaction Research June 28, 2017 report showed that if the company successfully quits alleged bribery, corruption, forced labor and deforestation, they could create a win-win situation that would be beneficial for shareholders and stakeholders. JBS Investor Relations commented extensively on the June 28, 2017 report and all JBS comments are included in the report: JBS: Financial Restructuring Could Be Delayed Due to Serious Allegations.

JBS’ Q2 2017 earnings call is August 15, 2017.