Analysis: Time, funding could hamper JBS plan to buy Sara Lee

By Guillermo Parra-Bernal

SAO PAULO (BestGrowthStock) – Whether Sara Lee Corp’s (SLE.N: ) Ball Park franks and Jimmy Dean breakfast sausages ultimately end up in Brazilian hands will likely come down to two potential deal-killers: funding and time.

Brazil’s JBS (JBSS3.SA: ) is already significantly leveraged following more than a dozen takeovers since 2007. The buys have catapulted the company into the big leagues as the world’s top beef producer but also left it relatively short of cash as it engages in talks to buy Sara Lee.

If JBS can pull off the deal, it would gain several synergies and be well positioned to reap the benefits of a U.S. economic recovery in coming months. It would also become the latest emerging-market commodity producer to buy into the world’s No. 1 economy, joining steelmaker Gerdau (GGBR4.SA: ) and private equity fund 3G, among others.

Yet the less-than-palatable options available for financing, which include borrowing from bond investors and asking the Brazilian government for financial backing, run the risk of alienating investors — especially if JBS’ management takes too long to line up the funds.

Pressure is already mounting on JBS Chief Executive Joesley Batista, with the company’s shares down 25 percent this year and its bonds also under pressure because of concern over the firm’s rising debt load.

“This deal could face serious financial and execution risks,” said Ricardo Kovacs, an analyst with Moody’s Investors Service in Sao Paulo. “Whatever the fund-raising scheme that they choose, they have to work out how to cut financing risks and generate positive free cash flows.”

The financial muscle required to buy Sara Lee is huge, if measured by the fact that the U.S. conglomerate, valued at $12.5 billion, is bigger than JBS. The Brazilian company has a market value of about $11 billion, according to Thomson Reuters data.

The most likely solution for JBS would be a credit line from Brazil’s state-run BNDES development bank, said Ricardo Almeida, a corporate finance professor with Sao Paulo-based Insper business school.

BNDES provided a generous credit line for the firm to buy U.S. poultry producer Pilgrim’s Pride late last year. The bank has played a major role in Brazil’s recent emergence as an economic power by selectively providing long-term loans at below-market interest rates to so-called “national champion” companies, including those making acquisitions abroad.

BNDES’ investment holding unit, BNDESPar, currently owns 27 percent of JBS debt — or about 3.5 billion reais ($2 billion) — and about 20 percent of its shares.

However, it is unlikely that JBS’ controlling shareholders, the Batista family, would be willing to water down their stake to accommodate the BNDES. Differences between the family and the bank over the company’s goals could also hamper an additional loan deal.

Rio de Janeiro-based BNDES, Brazil’s largest source of long-term loans for companies, had no comment. A spokesman at JBS did not immediately respond to Reuters’ request for comment.

DEBT ALREADY UNDER PRESSURE

Selling bonds in international and local markets remains another possibility, said Credit Suisse analyst Robert Moscow. JBS recently sold $900 million in bonds due in 8-1/2 years to stretch out payments and cover additional working capital requirements.

But an all-debt transaction is questionable at this point because it would more than double the company’s leverage ratio. At the same time, some investors say chances of an all-cash bid are “remote.”

By tapping the BNDES for funds, the company could have access to cheaper funding, outweighing the costs of seeing its leverage rise, analysts said.

The problem of offering more bonds to investors is that it could push JBS’ credit ratings further below investment grade. Moody’s rates JBS’ debt at B1, four levels below investment grade, with a positive outlook, Kovacs said.

JBS’ total debt was 15.8 billion reais at the end of the third quarter, up 161 percent from a year earlier. That is equal to 1.2 times net sales, according to estimates by Bank of America Merrill Lynch.

JBS’ total debt for the 12 months through September 30 was 4.3 times operational profit as measured by earnings before interest, tax, depreciation and amortization (EBITDA), compared with a multiple of 5.2 a year earlier.

“Markets would lash out at any large issuance at this point,” Insper’s Almeida said. “The alternatives for financing are limited.”

The yield on JBS’ 8.25 percent bond due in January 2018 jumped 0.1 percentage point on Monday to 8.09 percent, the highest level since December 14. JBS shares (JBSS3.SA: ) slid 1.3 percent to 6.91 reais.

BRAZILIAN SUMMER ALSO A PROBLEM

On an operational level, the deal makes some sense.

Integrating JBS’ U.S. unit and Sara Lee’s retail and food service business “would create immediate value by providing a home for the trimmings of JBS’s cattle and pig slaughtering operations,” wrote Credit Suisse’s Moscow, who estimated the unit could fetch $3.3 billion in a sale.

The deal could also help JBS boost its presence in processed foods, making profit margins more stable. JBS could further gain by reducing its reliance on commodities and turning into a key supplier of meats to rival food processors.

Equity markets in Brazil will run slowly through February because of the Southern Hemisphere summer holiday season, making it harder to raise money through a share offering, analysts said.

At the end of the third quarter, JBS’ cash and equivalents totaled 4.4 billion reais, compared with short-term debt of 5.6 billion reais.

In the end, the fate of the deal rests on how much time the board of Sara Lee will give JBS to raise the funds it needs for the transaction.

“Rushing a deal would tend to hurt, not improve, the company’s credit profile,” Moody’s Kovacs said.

($1=1.708 reais)

(Additional reporting by Roberto Samora and Marcelo Teixeira in Sao Paulo; Editing by Brian Winter and John Wallace)

Analysis: Time, funding could hamper JBS plan to buy Sara Lee