Investors and analysts on Friday questioned Brazilian meatpacker BRF SA’s move to take over local beef producer Marfrig Global Foods SA, raising doubts about the timing of talks and the potential for cost savings.
Shares of BRF, the world’s biggest chicken exporter, tumbled 5% as analysts suggested that a potential share swap with Marfrig, announced on Thursday, offered little room to cut fat.
“We would not expect a high degree of synergy from this combination,” wrote Santander analysts. “The bulk of their operations are not overlapping.”
BRF and Marfrig declined to comment beyond the securities filings they released on Thursday.
A person familiar with the talks said the complementary geography and portfolios of the companies had inspired them to form a global meatpacking giant that could go toe-to-toe with Brazilian rival JBS SA. Marfrig, based in Sao Paulo, has a strong U.S. presence.
BTG Pactual analysts saw little efficiency added by joining the companies’ beef, pork and poultry operations.
“I think Marfrig brings a lot of uncertainty to the BRF story,” said a New York-based debt analyst who is not authorized to speak with press and requested anonymity. “And buying Marfrig at the peak of the cattle cycle in the United States does not seem to be the best investment.”
Marfrig shares rose 0.7% on Friday.
The deal could also provide immediate relief to the balance sheet of BRF, which has struggled to recover an investment-grade credit rating.
“Financial logic seems greater than operational logic for a combination,” wrote Goldman Sachs analysts in a note to clients.
BRF’s debt is 5.6 times its earnings before interest, tax, depreciation and amortization (EBITDA). For the combined company, this ratio would be about 3.1 times EBITDA.
“Although the potential for lower leverage and reduction in the cost of capital may in the short term be beneficial, over the medium term the combined entity could see a potentially lower profitability profile,” Goldman Sachs analysts wrote.
XP equity analyst Betina Roxo told clients the potential merger was “neutral to positive” for both companies, but highlighted execution risks and the lack of more disclosures at this point.
“Synergies are hard to assess,” she wrote. “However, we see potential out of (general and administrative expense) optimization, selling expenses and commercial opportunities.”
Source: Reuters.com