Marfrig Investors Upset By Fine Print In National Beef Sale

Investors in Brazilian meat packer Marfrig Global Foods SA were described as “fuming” over the fine print in a $969 million deal that purchased 51% of National Beef Packing Co.

According to a Bloomberg report, that fine print gives owners of the remaining 49% of National Beef the right to demand Marfrig buy their shares at “fair value” after a lock-up that ends five years from now. The potential liability never appeared in any of Marfrig’s public filings and was only brought to light earlier this week by S&P Global Ratings. It was subsequently confirmed by Marfrig on Thursday.

Originally, Marfrig investors were happy with the National Beef purchase news and the fact the company aimed to substantially cut its debt levels. The first step in reducing that debt came last week as Marfrig announced it was selling chicken-nugget maker Keystone Foods LLC to Tyson Foods Inc. for $2.5 billion.

Now, the revelation adds to concerns that Marfrig’s leverage will remain elevated even after the Keystone sale. Bloomberg reported Marfrig managers have committed to cutting net debt to as low as 2.2 times earnings before interest, taxes, depreciation and amortization by year-end, but S&P sees the ratio closer to 4 times in 2018 and 2019. The National Beef put option combined with other items add about 5 billion reais to Marfrig’s liabilities, S&P said in a report.

The case adds to a track record of governance issues and lack of transparency that has undermined investors’ confidence in Brazilian meat companies, Soummo Mukherjee, an analyst at Mizuho Securities USA in New York, told Bloomberg. “Creditors typically apply a discount to these bonds.”

According to Marfrig’s press office, the National Beef deal assures Marfrig’s capital structure will remain intact until at least 2023, and minority shareholders will be able to sell no more than a third of their shares a year after that. Marfrig also said 15% of National Beef is owned by ranchers with long-term supply contracts with the meatpacker, and they chose not to sell their interest during the Marfrig transaction.

Marfrig never intended to hide any information from investors, according to Chief Financial Officer Jose Eduardo Miron. The put terms had been protected by confidentiality terms until the biggest minority shareholder, Leucadia National Corp., was compelled to disclose it in a little-noticed filing in June, Miron said.