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Brazil meat giant hopes US listing will sizzle despite questions

Cowboy guides Herd of cattle at South Para State in Brazil
Marco Antonio Rezende | Brazil Photos | LightRocket | Getty Images

Americans are known to be beef lovers but when it comes to owning a piece of the world's biggest meat packer they may want to chew things over extra carefully.

Brazil's meat juggernaut JBS SA, which has operations in five continents, is preparing to spin off its key businesses into a new entity that will be known as JBS Foods International. But JBS's U.S. beef profits have been under pressure in recent years and its profit margins in beef lag its closest meat-packing peer, Tyson Foods.

Also, while Tyson's stock is up nearly 60 percent over the past year, JBS's Brazilian-traded shares have fallen more than 16 percent during the same period and a top exec has been linked to a corruption probe in Brazil.

We see the recovery in JBS U.S. beef as the most important driver for earnings in the next 12-24 months
Luca Cipiccia
Goldman Sachs analyst

"Management recently highlighted that getting the reorganization and U.S. listing across the line is now its number-one priority," Goldman Sachs analyst Luca Cipiccia said in a recent research report. "Delays in the U.S. listing process and governance concerns remain risks."

JBS Foods International wants to list shares on the New York Stock Exchange under the symbol "JBS."

For the past decade, the company has been on an acquisition tear, gobbling up protein-related businesses around the globe but also leaving it with a heavy debt load of nearly $18 billion. Last year, JBS added to its stable of protein businesses by acquiring Primo Group, Australia's largest fresh meats producer, as well as Cargill's pork business. In 2009, JBS acquired a controlling stake in Pilgrim's Pride, a leading poultry that contributes to about 17 percent of JBS's revenue.

In all, JBS has exposure to the beef, pork, poultry, sheep, lamb, leather and processed food markets and sells to more than 100 countries worldwide. The U.S. beef unit represented about 45 percent of its sales last year but the profit growth has come from its U.S. poultry business.

"We see the recovery in JBS U.S. beef as the most important driver for earnings in the next 12-24 months," said Cipiccia. "Industry data suggest that growth in U.S. cattle herds, which inflected in 2015, may continue into 2017, pointing to a longer cyclical recovery."

According to Goldman, JBS holds about 22 percent market share in the U.S. beef industry compared with Tyson's 24 percent share. It predicts JBS's U.S. beef unit will generate margins of 1.3 percent this year compared with Tyson's higher 4.1 percent margin. Still, both margins are very low when compared other proteins such as pork and poultry.

Under the reorganization, the meat giant will contribute substantially all of its assets except the Brazilian beef business and leather business. In 2015, non-Brazilian sales represented 84 percent of its revenue.

Analysts say the U.S. listing could reduce the JBS's cost of capital, broaden its investor pool, and raise its overall profile and status in the industry for the next stage of growth.

"Ultimately it could attract a lot of interest," said Jeremy Scott, an analyst at CLSA in New York. "Growth funds will look at this in terms of the overall global demand for protein, which continues to go up every single year."

Goldman Sachs estimates JBS's spinoff will have 2017 revenues of $48.8 billion and make it easily the largest U.S.-listed protein company. The spinoff company will be based in Ireland and could start trading on the NYSE as early as the current fourth quarter although analysts indicate that may be delayed now until the first quarter of 2017.

The NYSE declined comment for this story. JBS didn't respond to questions about the timing.

The wealthy Batista family and Brazil's state-run development bank are JBS's current controlling shareholders and can exchange their shares for the new U.S. listing but have a so-called lock-up period where insiders will be restricted from selling shares for a period of six months.

The Batista family ties also have produced a string of ongoing headline risk.

In January, a Brazilian court accepted a criminal complaint from a federal prosecutor against certain individuals, including Joesley Batista, the billionaire chairman of JBS SA, for "alleged violations of the Brazilian financial system laws," according to company's SEC registration statement filed in connection with the proposed U.S. listing.

To be clear, JBS is not the target of the probe. Nonetheless, JBS's Brazilian-listed shares sank about 20 percent in the days immediately following the January complaint.

More bad news came in July when Brazilian federal authorities searched the offices of JBS's parent company and the home of JBS SA's chairman as part of a corruption probe involving state-run companies' pension funds. He also serves as CEO of J&F Investimentos, the family's investment holding vehicle that controls the meatpacker.

Then, in September JBS SA's chairman and his brother, JBS SA CEO Wesley Batista, briefly stepped aside from their posts due to the probe but were reinstated after agreeing to certain guarantees.

"We cannot assure you that this proceeding will not affect our reputation or the trading price of the JBS Foods International ordinary shares or the JBS Foods International [Brazilian-listed stock]," JBS said in its SEC filing in August.

Yet another headline risk involves Pilgrim's Pride, the company's U.S. poultry business, which was named last month in a class action lawsuit that alleges price-fixing with a group of other boiler chicken companies. Tyson and Sanderson Farms are among other companies named.

"Pilgrim's strongly denies any allegations of market manipulation," the company said in an email statement. "The company welcomes the opportunity to defend itself against these claims through the legal process."

The JBS spinoff is not expected to impact Pilgrim's Pride, which is listed on the Nasdaq. Pilgrim's Pride stock is up more than 20 percent so far this year.