Brazilian protein heavyweights BRF SA and Marfrig Global Foods SA have begun merger talks in a bid to gain further scale and savings to better navigate volatility in the global meat business.
The boards of both firms authorized the signing of a memorandum of understanding to “deepen discussions” about combining businesses, they said Thursday in separate filings.
BRF shareholders would own a majority stake in the combined company, which would have a footprint in all major proteins and a geographical reach extending from Latin America and the U.S. to the Middle East. The two companies expect a combination to reduce exposure to risk, lower financial leverage and provide a better capital structure.
Agribusiness and protein producers have been adjusting their businesses to cope with supply gluts and low prices and, in the past year, a trade war between the U.S. and China that has disrupted trade flows. In the case of the two Brazilian meat companies, a combination may help ease their collective debt burden racked up over years of expansions.
Sao Paulo-based Marfrig last year became the world’s second-biggest beef producer after acquiring Kansas City-based National Beef Packing Co.
BRF, the world’s largest chicken exporter, has been trying to recover from a series of setbacks including a food-safety scandal, a revolt by shareholders and an European ban on its shipments. The problems led the company to post a record loss last year.
Still, the announcement comes at a time Brazilian meat companies are surging on the back of a deadly pig disease sweeping across China.
China, the biggest hog producer and consumer, is projected to lose 10% of its pork production this year due to the disease, according to the U.S. Department of Agriculture. Meat prices and trade volumes -- whether it’s chicken, beef, seafood or even plant-based alternatives -- are likely to rise as a result, boosting revenues of major suppliers.
“The move is surprising in a moment where the protein market is a hot topic,” said Werner Roger, a founding partner at asset manager Trigono Capital. “There’s some complementarity between the businesses of both companies, but it’s still unclear how much they will gain in synergies and how both cultures and leaderships will combine. I wouldn’t hold my breath.”
After shares in BRF and Marfrig tumbled last year, they have rallied 32% and 24%, respectively, this year in an industry-wide recovery fueled by the spread of African swine fever in China. Still, the two companies have been outperformed by larger rival JBS SA, which is up more than 90% in 2019.
BRF is the more valuable of the two at $5.95 billion, compared with Marfrig’s $1.06 billion. The combination would still be overshadowed by $15 billion JBS.
While there’s no defined structure for the combined businesses, the deal would be based on the average market value of each company over the last 45 days, taking into account volume of share trading, BRF said. That would result in a split of 85% for BRF shareholders and 15% for Marfrig -- which could change as the talks evolve, according to the company.
The MOU sets an exclusivity period of 90 days, which can be extended by another 30 days.
“Both of the companies can potentially benefit from an event like this as they try to improve their margins further,” said Ian McCall, who advises on $190 million in emerging-market assets at First Geneva Capital Partners. “The devil as they say is on the details.”