Will Brazil's Multinationals Increase Their M&A Activity in the U.S.?
While there has been and currently is considerable focus on inbound mergers and acquisitions originating from China and other Asia-Pacific countries, Brazil’s multinational businesses are also showing strong interest in U.S. targets.
Earlier this month there were several reports that JBS SA of Sao Paulo was on the verge of purchasing financially troubled Pilgrim’s Pride of Pittsburg, Texas for approximately $2.5 billion. If completed, the deal would create the second largest chicken producer in the U.S. According to another report, in July, a U.S. unit of JBS filed to list its shares on the New York Stock Exchange. CNNMoney.com makes the case that JBS has a strong track record for U.S. purchases. In 2008, JBS acquired the beef operations of Smithfield Foods for $565 million. In 2007, JBS bought Swift & Co. of Greeley, Colorado for approximately $225 million.
The Deal’s blog also pointed out that a highly-effective Brazilian-dominated management team led InBev’s $52 billion merger with Anheuser-Busch Cos.
JBS’ planned and completed acquisitions and the accomplishments of InBev’s executives can be viewed in the context of the recent significant growth in Brazil’s direct investment abroad. According to an August 2009 publication of the Vale Columbia Center on Sustainable International Investment, authored by Luís Afonso Lima and Octavio de Barros, Brazil’s outbound foreign direct investment (OFDI) has surged. Although 2009 is likely to show substantially less OFDI than 2008, growth is likely to resume in 2010. If Brazil is able to overcome certain obstacles to OFDI, its investment should permit it to grow at even faster rates.
Vale’s publication reports that from 2000 to 2003, Brazilian OFDI averaged $0.7 billion each year. That annual average increased to $14 billion for 2004 through 2008. In 2008, Brazil’s outbound investments reached nearly $21 billion. In the first five months of 2009, however, Brazil’s OFDI was reduced by almost 90% from the comparable period in 2008. Vale’s publication predicts that Brazilian OFDI would hit the $4 billion level for all of 2009. If completed, JBS’ acquisition of Pilgrim’s Pride would account for over 60% of that amount.
According to the publication, Brazilian enterprises, whether private or governmentally sponsored, are seeking to make outbound investments, motivated by their desire to:
- follow clients into international markets
- defend competitive positions
- monitor competition in international markets
- meet international demand
- reduce dependence on Brazil’s domestic market
- find lower costs, better infrastructure and more attractive fiscal incentives
In the case of JBS, the likely reason behind its US initiative is to continue to build its meat products platform in the world’s largest developed consumer market, as well.
There are factors that may impede growth in outbound investment from Brazil. The Vale publication cites three principal impediments that must be overcome if Brazilian OFDI is to fulfill its promise:
- the Brazilian Development Bank and domestic Brazilian banks must provide investment and acquisition financing to support OFDI initiatives
- more personnel with skills and knowledge about offshore markets must become available
- the Brazilian government must enter into additional double taxation treaties to relieve the inordinately high tax burden on Brazilian multinationals
The Vale publication is by Luís Afonso Lima and Octavio de Barros, and is entitled “The growth of Brazil’s direct investment abroad and the challenges it faces,” Columbia FDI Perspectives, No. 13, August 17, 2009. The information relating to the report has been reprinted with permission from the Vale Columbia Center on Sustainable International Investment (www.vcc.columbia.edu).
Updated: On September 15 Pilgrim’s Pride confirmed that JBS SA will buy a majority stake in the company in a deal that values the company at $2.8 billion. Pilgrim’s Pride has agreed to sell 64 percent of stock in the reorganized company to JBS for $800 million in cash. Existing shareholders will receive shares totaling 36 percent of the company. It is not yet clear whether the parties will file a notice with CFIUS for regulatory clearance. At the same time JBS will acquire control of Bertin SA, one of Latin America’s largest producers and exporters of milk products, beef and leather.
