This post is Part II of our earlier discussion on Marfrig (read Part I here: Company Overview: Marfrig). Below you will find BTG Bank’s analysis on Marfrig’s logistics division sale and its impact on the company’s outstanding debt…
Marfrig announces sale of Keystone’s global logistics division for US$400mn. On September 18, Marfrig announced that it received a proposal from The Martin-Brower Company to buy its quick-service restaurant logistics assets (in the US, Europe and Asia) from its subsidiary Keystone for US$400mn (or R$692mn) – payable upon conclusion of the deal in 4Q11. Marfrig didn’t provide sufficient color for us to estimate the implied multiple. However, we expect the distribution assets to be valued at a premium to protein processing assets (e.g. Sysco trades at 7.5x 2011 EBITDA), leading us to believe that the implied multiple was accretive.
Rationale is to focus on core protein businesses… By divesting its distribution and logistics assets, Marfrig believes it will be able to focus on its core protein business and leverage its global protein processing capacity.
…but we see a few other implications. We are, of course, pleased that the deal will help deleverage Marfrig’s balance sheet (down to 4.2x from 4.4x leverage based on our 2011 year-end estimates), which we see as essential to start generating some cash. We also believe the implied multiple is in line with global distributors (somewhere in the high single-digit), which is above Marfrig’s current 6.2x EBITDA. But we also flag that Marfrig is divesting one of its assets that we like the most (distribution – due to its more stable operating margins and cashflows), thereby increasing volatility related to the protein business and reducing long-term margin visibility.
Valuation: R$10.5/share. Still Neutral-rated, pending further disclosure. Although we believe the multiple paid was above Marfrig’s current level (making it a short-term accretive deal for shareholders), we would first of all prefer to see it delivering the expected operational improvements until achieving healthy and sustainable cash generation – which is what, in our view, the investment case is still lacking. We thus maintain our Neutral rating and wait for further color to be provided at Tuesday’s conference call.
Statement of Risk. Main risks are 1) macro environment (interest rates, employment, currency among other), 2) exposure to commodities price volatility, 3) negative cash flow for most companies seen above average growth, 4) Sanitary and commercial restrictions.