For JBS SA, the Brazilian meatpacker that transformed itself into the world’s biggest producer of beef and chicken, location is everything.
So says Chief Executive Officer Wesley Batista, who’s hoping a change of address will be the key to unlocking cheaper financing for a company that now gets just 15 percent of its revenue from Brazil. When he sat down for an interview this week, the 46-year-old from rural Brazil was adamant that it’s the cost of credit -- and not a desire to save on taxes or other corporate expenses -- that’s the main motivation behind the restructuring that Sao Paulo-based JBS announced on May 11.
“JBS doesn’t have the same access to capital as other global players,” Batista said in an interview Monday. "We’re seeking a structure that better reflects the company JBS has become."
That structure means shipping JBS’s corporate registration from Brazil to Europe (probably Ireland, Batista says), issuing shares in the U.S. and turning its Brazilian operations into a subsidiary. Everything else -- including management, operations and taxes, too -- stays more-or-less the same, Batista said.
The fact that a company the local media has dubbed a “national champion” is essentially saying it doesn’t want to be a Brazilian entity anymore illustrates the disadvantages local companies face when competing abroad. JBS overtook rival Tyson Foods Inc. as the world’s biggest poultry producer in 2014 after a decade-long, $20 billion acquisition spree with the help of Brazil’s national development bank. The state-owned lender known as BNDES injected 5.6 billion reais ($1.6 billion) in capital and still holds a 24 percent stake.
But even though JBS now gets more than two-thirds of its revenue from the U.S., it still gets lumped in with Brazil’s other high-yield issuers when it goes to tap credit markets, Batista said. An original plan to keep the Brazilian parent and spin off the U.S. unit, first derailed amid the fallout of the international financial crisis, also suffered as the South American nation’s currency, stocks and bonds collapsed in recent years.
JBS’s $750 million bond due in 2024, among its most-liquid notes, yields 6.99 percent, data compiled by Bloomberg show. While that’s down about 1 percentage point since before JBS’s May 11 announcement, it’s more than twice the 3 percent yield on Tyson’s 2024 bonds.
“Rating and maturity differences considered, our credit costs should be closer to Tyson’s levels,” Batista said, adding that JBS will look at lengthening maturities and swapping out its more-expensive debt after the restructuring is completed. JBS is rated BB by Fitch Ratings, one step below investment grade and two steps below Tyson.
The ratings firm said in a statement this month that the reorganization should reduce earnings volatility by limiting the company’s exposure to exchange-rate swings, so long as JBS also cuts back on its use of currency hedges. JBS made a fortune last year betting against the Brazilian currency, then lost half the windfall in the first quarter when the real rebounded.
“The move makes total sense,” said Thiago Kapulskis, an equity analyst at Brasil Plural SA, a brokerage in Sao Paulo. He said being listed in New York will also allow JBS’s stock to be compared to Tyson’s, which trades at 15 times estimated earnings. JBS trades at 8 times. “JBS will now be perceived by the market as the American company it really is.”
JBS has missed out on the stock rally this year in Brazil as the government’s budget watchdog said it may have had “special treatment” in loans it got from BNDES. The stock also tumbled earlier this month to a three-month low after a newspaper reported the company may have made illegal political donations, allegations JBS has denied. The shares are down 13 percent this year.
The Ibovespa has surged 15 percent, or 28 percent in dollar terms, making it the world’s second-best performing benchmark index, on bets that Acting President Michel Temer will have better luck than his predecessor at rebuilding investor confidence, reviving growth and containing an exploding budget deficit.
So was JBS’s decision prompted by instability in Brazilian markets?
“Yes and no,” Batista said. The chief executive said he’s optimistic about the outlook after a new president took over, but Brazilian companies have been crippled for years by bureaucracy and complicated tax and labor laws, which is part of the reason why investors demand a premium when buying Brazilian assets.
Those added challenges -- locally known as “Custo Brasil,” or the Brazil Cost -- can best be described in JBS numbers, Batista said. The company employs 150 people in Sao Paulo to deal with Brazilian taxes, compared with 15 workers to do the same job for U.S. operations. Its Brazilian legal department has more than 80 employees, 16 times more than in the U.S. team. The reorganization won’t ease those challenges because JBS will maintain its operations on four continents, which are subject to local tax and labor laws, Batista said.
"I only came to fully understand what ‘Custo Brasil’ was when JBS became an international company," Batista said.