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Can JBS afford its latest shopping spree?

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Shopping sprees by JBS used to spook shareholders and creditors alike. But investors are, so far, taking a relaxed view of the Brazil-based meat giant's return with gusto to the takeover trail.

Analysts reacted positively to JBS's announcement of the $1.45bn purchase, in cash, of Cargill's US pork business, an acquisition which came days after the group agreed to pay $1.5bn for rival Marfrig's Irish poultry unit Moy Park.

JBS shares rose 1.6% in Sao Paulo on Thursday on the deal with Cargill, the US-based agribusiness giant.

'Compelling' economics

Cargill's pork business consists of 2 processing facilities, with combined slaughter capacity of 38,200 hogs a day, as well as hog farms and feed mills across the Midwest.

JBS reports that the business, has annual revenues of $2.56bn a year, and annual earnings before interest, taxation, depreciation and amortisation (ebitda) of $212m over the last 12 months.

Brazilian bank BTG Pactual called the economics of the transaction "compelling".

Based on its own estimates of the pork business' revenues and earnings, BTC Pactual calculated that the "multiple," the ratio of the sold business's total value (including debt) to its ebitda, stands at 6.6 times.

Not only is this in line with price of JBS on the stock market, it is below the multiple of 9.0 times on the group's deal with Marfrig for Moy Park last week, an acquisition which received a cooler reaction from analysts and the market.

Clearer gains

BTG Pactual said that "we like the strategic fit" of the Cargill pork unit "a lot more than Moy Park - quick gains also seem clearer".

"JBS's expansion in a protein where the US is a clear winner, demand keeps growing, and where JBS already seems to be thriving, mean the quick gains are much clearer to us."

BTG Pactual estimates that JBS's market share of US pork production after the deal will climb to 19% from 11%.

If JBS can find ways to cut costs or increase profits at Cargill's pork unit, by integrating it into its existing pork business, the price looks even more reasonable.

In fact, Brazilian bank Bradesco calculated that including those synergies between the new acquisition and JBS's existing US business, the multiple was just 5.0 times.

Anti-trust threat

Bradesco was positive on the deal, noting that it had added hog farming to the group's US division, as well as expanding the unit's pork processing capacity.

The bank did note the risk of the deal being blocked by US antitrust authorities - which, indeed, stymied JBS's attempts to acquire the US group National Beef in 2009.

But Bradesco pointed out that JBS's combined US pork business would be smaller than US pork market leader Smithfield, making a veto unlikely this time.

Brazilian bank Itau Unibanco said "we like the strategic direction that the company is consistently taking," despite noting the increased execution risk as JBS juggles a number of takeover deals at once.

Leverage to rise

Still, while the deal might make strategic sense, can JBS afford it?

The group has got in trouble before for overextending itself with acquisitions, and indeed early in the decade took a break from deals to repair its balance sheet, and in 2013 saw its net debt-ebitda ratio soar to a heady 4.3 times, to the chagrin of bondholders.

Bradesco did note that the cost of the Moy Park and Marfrig deals combined looked likely to push the company's leverage ratio to 3.1 times, in terms of net debt to ebitda, by the end of the year.

However, Fitch Ratings said the deal was neutral to JBS' credit quality, which it already ranks below investment grade.

Fitch saw the cost of the takeover, and the resulting fall in JBS' cash reserves, increasing the overall leverage ratio of the group by about 0.2-0.3 points to 2.8 times, not including the effects of the Moy Park deal.

Dollar revenue

Concerns over JBS's debt levels are being eased by the extent to which, unlike some other Brazilian corporate heavyweights, it has substantial dollar-denominated revenues to match against debts denominated against the greenback.

Some 80% of its revenues are taken in dollars, meaning that it has not been so exposed the drop in the real – and in fact enjoyed a jump its results, as reported in the Brazilian currency.

By William Clarke

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