JBS Earnings Set to Triple on Convertible Debt Sale: Week Ahead
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By Paulo Winterstein and Lucia Kassai
Dec. 21 (Bloomberg) -- JBS SA’s planned sale of $2 billion in convertible bonds to finance the acquisition of Pilgrim’s Pride Corp. and Bertin SA may help triple the profit of the world’s biggest beef producer next year, Legg Mason Inc. said.
The 8.2 percent drop in JBS shares since the sale was announced Dec. 14 is unjustified because any dilution from the conversion of debt will be more than compensated for by a surge in revenue, said Aquico Wen, who manages the $1 billion Legg Mason Emerging Markets Equity Fund at Esemplia Emerging Markets.
JBS, based in Sao Paulo, expanded the past three years through about $9 billion of takeovers, including the purchase of Pittsburg, Texas-based Pilgrim’s Pride and Sao Paulo-based Bertin. The bonds may be converted into a 20 percent to 25 percent stake in JBS USA Holdings Inc., which plans to sell shares in an initial offering as soon as next year, JBS said this month in a regulatory filing.
“The acquisitions of Pilgrim’s Pride and Bertin, these are massively accretive,” said Jorge Mauro, an analyst at Legg Mason’s Esemplia Emerging Markets in London. After a “difficult” year for sales in 2009, “if you normalize 2010 and add all the acquisitions, on an EPS basis you could easily see it double or triple next year,” Mauro said.
Per-Share Profit
JBS earned 12 centavos a share in the second quarter after two quarters of losses. Profit slipped to 11 centavos a share in the July-to-September period. The company’s earnings per share was as high as 49 centavos in the third quarter of 2008 after JBS reported gains of 423.9 million reais from currency trades.
JBS has 2.28 billion reais ($1.28 billion) of bonds outstanding now, according to data compiled by Bloomberg.
JBS trades at 11.6 times earnings before interest, taxes, depreciation and amortization. That’s almost three times the value of Santo Andre, Brazil-based Marfrig Alimentos SA, the world’s fourth-biggest beef producer, and of Barretos, Brazil- based Minerva SA, according to data compiled by Bloomberg. BRF Brasil Foods SA, the Brazilian poultry producer formed after Perdigao SA took over Sadia SA, fetches 11.6 times so-called ebitda.
JBS has outperformed the benchmark Bovespa index this year, climbing 94 percent on the outlook a global recovery will boost revenue. The Bovespa has increased 78 percent, the best gain in six years, after a 41 percent drop in 2008.
The shares slumped 8.2 percent last week to 9.55 reais on Dec. 18 on speculation the conversion of bonds would dilute per- share profit and on concern the company is taking on more debt to expand through acquisitions, according to Sao Paulo-based Legan Asset Management, which sold JBS shares last month.
‘Frightening’ Debt Levels
“The level of debt is frightening and at this pace of acquisitions the company will likely increase debt even more in the future,” Fausto Gouveia, who oversees 200 million reais in investments for Legan Asset Management, said in a telephone interview from Sao Paulo.
The sale of a stake in JBS USA through bonds may enable Brazil’s state development bank BNDES to buy a stake in a company that isn’t publicly traded, Esemplia’s Mauro said in a telephone interview. Esemplia held more than 1.2 million JBS shares at the end of October.
A spokesman for Rio de Janeiro-based BNDES, which holds 20 percent of JBS through direct and indirect stakes, declined to comment.
The beef processor announced plans last week to buy Australian lamb producer Tatiara Meat Co. for A$30 million ($27 million) and said it was looking for assets in Europe and Asia to process and distribute meat.
‘Healthy’ Growth
JBS considers debt levels at two to three times earnings as “comfortable because it allows us to grow in a healthy way,” Jerry O’Callaghan, the director of investor relations, said in a Dec. 17 interview. The company expects to cut costs by 500 million reais a year with the integration of Bertin and by another $200 million a year with Pilgrim’s Pride, according to an October presentation.
The bond sale, which will lift the company’s long-term debt to about six times Ebitda, probably won’t harm the company’s credit rating, Moody’s Investors Service and Standard & Poor’s said. JBS is rated B1 by Moody’s, four levels beneath investment grade, and B+ by S&P, also four levels below investment grade.
Moody’s may consider as much as 100 percent of the value of the convertible bonds as equity for credit rating purposes, Moody’s Soummo Mukherjee said in a telephone interview from New York. S&P may consider bonds that are convertible within three years as mostly equity, Reginaldo Takara, an S&P analyst, said by telephone.
The bonds will be purchased by “one or a few” investors, O’Callaghan said. JBS has yet to disclose terms of the bond.
Should the IPO of JBS USA fail, the bonds will be converted into JBS SA shares, according to company filings. Esemplia’s Wen said the offering may be a condition of the bond sale.
‘Limited’ Dilution
“If you work under that assumption, the earnings dilution is actually quite limited,” Wen said by telephone from London.
“The benefits of the debt sale will be more important than the dilution that shareholders will see,” Luiz Paulo Aranha, a manager at LLA DTVM, which bought 100,000 JBS shares this year for its NP Luma FIA fund, said in a telephone interview. “The result of this is that you’re going to have a less leveraged company that’s more fit to compete in a recovering market.”
The following is a list of events in Brazil this week:
Event Date
Weekly Trade Balance Dec. 20
Tax Collections Dec. 22
IBGE IPCA-15 -- Monthly Dec. 23
Central Government Budget Dec. 23
To contact the reporters on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net; Lucia Kassai at lkassai@bloomberg.net
