JBS Feels Blow as Brazil's Batista Boys Mired in New Probe

For investors in JBS SA, the world’s largest beef and poultry producer, it’s a pattern that’s becoming all too familiar: A criminal investigation involving controlling shareholders, a stock rout and then a quick, albeit incomplete, rebound.

That’s how it played out in January, when a Brazilian public prosecutor accused executives of the control group including JBS Chairman Joesley Batista of financial crimes. It happened again in July, when a unit of JBS’s parent company was searched in the sweeping corruption scandal known as Carwash. And once again on Sept. 5, when police carried out another raid in the building that houses JBS’s headquarters, this time as part of an investigation into pension-fund fraud and the group’s pulp unit. Within hours, JBS’s shares had tumbled 10 percent, only to make up much of that lost ground later in the week.

While investors may have become used to the routine, and shown to some extent a tolerance for all the twists and turns, it’s cost them dearly. JBS shares are down 4.5 percent this year, missing out on the world-beating rally that’s swept across the Brazilian stock market. 

And so there’s a growing sense that this latest investigation is the one that has finally caught up to Joesley and Wesley Batista, the brothers who turned their father’s butcher shop into a global meat-packing empire. Wesley stepped down as CEO and Joesley as chairman on Tuesday as a judge ordered them to vacate the posts, then reclaimed their roles the following day after reaching an agreement with prosecutors. Analysts and investors now talk openly of their desire to see the brothers leave the company as it tries to pull off its latest transformation and shift its corporate residence abroad.

“It’s a distraction -- the whole investigation, these ongoing probes, which have very little to do with JBS’s ongoing operating business," said Arjun Jayaraman, a money manager who helps oversee $3.4 billion in assets including some $30 million in JBS shares at Causeway Capital Management LLC in Los Angeles. "If they were to somehow exit the company, it’d be a very good thing from a sentiment perspective.”

Five investigations

JBS hasn’t been accused of wrongdoing in any criminal probe. The billionaire Batista family’s holding company, J&F Investimentos, and its units have been named in at least five investigations in Brazil in the past year. Two of the inquiries are being carried out by the federal audit court into possible irregularities in loans provided by state-owned banks, including financing agreements with JBS. Even in a nation still reeling from Carwash, the biggest corruption scandal in Brazilian history, it’s a track record that raises eyebrows.

J&F, which Joesley and Wesley control with three other siblings, has denied any wrongdoing.

The latest case, known as Operation Greenfield, focuses on transactions between four pension funds of state-run companies and private firms including the pulp producer owned by J&F. As part of that raid, Wesley was taken in for police questioning after the action last week.

The judge overseeing Greenfield ordered 40 executives at various companies to step aside from their current roles, including JBS’s top two officials. The meatpacker said in a statement Tuesday that it had appointed another brother, Jose Batista Jr., as interim CEO and patriarch Jose Batista Sobrinho as chairman, replacing Joesley. Hours later, a spokesman said the company had succeeded in overturning the order, and both brothers were reinstated after a board meeting Wednesday.

“JBS has a robust global and regional business structure,” Jose Batista Jr. said in the statement. It also has “experienced senior executives and a solid corporate governance.”

JBS shares rose 0.5 percent as of 12:20 p.m. in Sao Paulo trading.

Governance pressure

Some investors and analysts say it might not be such a bad thing if Wesley and Joesley left.

“Judicial limitations on the CEO and chairman to run their firms or travel abroad put more pressure for better governance,” Carlos Laboy, a senior analyst at HSBC Securities USA Inc., said in a Sept. 7 report. “Why wouldn’t investors reward JBS’s valuation if the company gets a new board of directors, a new non-family related chairman and CEO, a bigger role for professional management, a new legal jurisdiction, a NYSE oversight, and more distance from family home-office problems?"

Itau BBA and BTG Pactual analysts, meanwhile, aren’t nearly as optimistic. The banks cut their ratings on JBS’s shares last week, saying a management shake-up could derail the U.S. listing. After all, Joesley and Wesley were masterminds behind the $20 billion acquisition spree that won over investors and transformed JBS into the biggest foreign meat producer on U.S. soil. Along the way, the brothers built up a reputation for turning money-losing slaughterhouses into meatpacking stars by getting their hands dirty and mastering the art of butchery.

JBS said in an e-mailed response to questions that it’s maintaining normal operations amid the turmoil, including plans to move forward with its restructuring plan.

U.S. listing

The company’s stock surged 40 percent in the three trading sessions after it announced the plan in May that also includes sending its corporate registration from Brazil to Europe (probably Ireland, Wesley has said) and turning its Brazilian operations into a subsidiary. 

Investors see the plan as crucial to reducing borrowing costs, shedding emerging-market risks and unlocking value -- the final step in JBS’s long march toward becoming a truly global player.

"The Batista brothers were responsible for leading the company on its journey to becoming the giant it is today, but the relationships they’ve built and the commitments they’ve made on the way may still have undesirable consequences," Adeodato Volpi Netto, head of capital markets at Eleven Financial Research, said by telephone. "JBS is bigger than both of them now. It can stand on its own two feet."