JBS-Swift CEO, Joesley Batista is in deep discussion with his top strategists in a conference room at JBS’s São Paulo headquarters. He stands in front of a large world map on the wall that is covered with dozens of colored pins. Each pin represents a packing plant, distribution center or sales office that is part of the JBS global meat empire. "So," says Batista, "what pin color should we make Pilgrim’s Pride? And which lamb companies in Australia are we going to target?"

The above scene is fictional. But one can imagine scenarios like this playing out in JBS headquarters for the past several years. Its opportunistic acquisitions in the U.S., Australia, Europe and in its native Brazil have propelled it to the top. Little known a few years ago, it is soon to become the world’s largest meat and poultry company, with two more proposed acquisitions.

JBS, which already dominates the global beef business, will enter the chicken business for the first time after agreeing to acquire Pittsburg, Texas-based Pilgrim’s Pride, the second-largest U.S. proces- sor behind Tyson Foods, Springdale, Ark. JBS will also enlarge its South American and global beef business by becoming majority owner of Bertin SA, Brazil’s third-largest beef company. It will then have the capacity to process 90,000 cattle per day. This will make it nearly twice as big globally as the next three companies combined. The two acquisitions, announced in mid-September, are expected to boost JBS’s annual revenues to $29 billion. This puts it ahead of Tyson, which had total revenues in fiscal 2008 of $26.862 billion.

Other Brazilian meat and poultry companies have been in a similar growth mode. Second-largest beef company Marfrig Alimentos SA continued its expansion and protein diversification by agreeing to acquire Minneapolis-based Cargill Inc.’s Brazilian poultry and pork business. As if not to be outshone by JBS, Marfrig made its announcement the same week as JBS. Only a few weeks earlier Marfrig had ended talks to merge with Bertin. It apparently had plans for a different way to expand its beef operations, as it announced the leasing of 11 plants in Brazil in late September. Marfrig now has a global capacity of 30,150 head per day, making it the world’s third largest beef packer.

Meanwhile, Brasil Foods is the giant new poultry company that emerged after Sadia SA agreed to merge with Perdigao in May. Indications are that the new entity could make a push into the U.S. poultry market through partnerships or outright acquisitions. Perdigao and Sadia had been strong competitors for years. But Sadia stumbled badly last year when it lost nearly $400 million on bad currency bets as Brazil’s real dropped. The losses surpassed the company’s 2007 profits and it was forced to seek a partner.

Brasil Foods will have annual revenue of $10.6 billion, 42 plants and a workforce of 119,000. That makes it two-and-a-half times smaller than JBS and Tyson in revenues. But Brasil Foods wants to grow. "We have a planet to conquer," Perdigao CEO Nildemar Secches told reporters when the merger was announced. Brasil Foods President Jose Antonio Prado Fay more recently said the company wants to become a familiar brand in the U.S., in addition to its main markets in Russia and the Middle East.

"The U.S. is a very important market for us and we are not present there at all. We can enter this market either through partnerships or by acquisitions," he said.

Governmental links

A common thread in this remarkable expansion is the link between government and industry, and the Brazilian government’s investment in companies through share ownership. For example, Luiz Furlan led Sadia for a decade before serving as trade and industry minister in President Lula da Silva’s administration. He resigned in 2007 and returned to Sadia last October as its financial crisis worsened. Former Agriculture Minister Marcus Vinicius Pratini de Moraes is on JBS’s board of directors.

Financial support has come through Brazil’s National Development Bank (known as BNDES). It owns 13 percent of JBS SA’s common stock. It currently has a 27 percent stake in Bertin. JBS’s acquisition of Bertin is an all-stock transaction. Upon completion, JBS will own 60 percent of the equity of a new holding company and BNDES will own 22.4 percent of the equity. BNDES also holds 14.7 percent of Marfrig’s common stock after it went public in 2007.

JBS revealed its deal-making ability with its two latest moves. It has seemingly amassed a considerable war chest for acquisitions. It sold $700 million of five-year bonds in international markets in April and had $1.3 billion in cash at the end of the second quarter. It also filed on July 24 for an initial public offering to raise up to $2 billion through JBS USA. Yet, it is spending relatively little cash on the new deals. It will take a 64 percent stake in Pilgrim’s for $800 million in cash. It has also lined up $1.5 billion in financing to pay down Pilgrim’s debt. The overall transaction, which JBS is executing through JBS USA Holdings Inc., represents an enterprise value of about $2.8 billion.

The deals illustrate how JBS snaps up distressed assets and proceeds to turn them around, say observers. Pilgrim’s filed for Chapter 11 bankruptcy protection last December after suffering heavy losses over four consecutive quarters. It took on a lot of debt to acquire Gold Kist in December 2006 for $1.2 billion then got hurt by high feed costs and excess chicken production. Its bankruptcy filing listed assets of $3.75 billion and debt of $2.72 billion. Pilgrim’s sale to JBS will be part of its Chapter 11 reorganization plan, which it expects the Bankruptcy Court to confirm by December. The deal will then close.

Regarding Bertin, JBS waited to see if Marfrig and Bertin would merge. When talks ended, JBS made its move, say observers. JBS’s entry into the U.S. and Australian industries was equally opportunistic. The former owners of Swift & Company were clearly keen to sell. The added dynamic in that acquisition is that JBS outbid a Cargill/Smithfield Foods consortium and National Beef Packing. It paid more for Swift than the other bidders wanted to pay because JBS knew Swift was a critical springboard for it to establish a global beef production platform, say observers.

JBS equally was able to acquire the Smithfield Beef Group because Smithfield Foods, thwarted by JBS in its effort to own Swift’s beef operations, decided to exit the beef business. National Beef’s owners were also keen to sell to JBS. But the Justice Department thwarted that deal. Conversely, it quickly approved (in mid-October) JBS’s purchase of Pilgrim’s.

JBS’s global beef platform (with Bertin, which can process 16,500 head per day) will include about 100 plants (some further-processing) with a daily slaughter capacity of 90,400 head per day. This will put it even further ahead of Cargill (39,300 head), Marfrig (30,150) and Tyson (29,200 head).

Diversifying strategies

JBS and Marfrig have both pursued a strategy of protein diversification. JBS will have its own beef, pork, chicken and lamb to sell to customers in every corner of the world. It will likely use its global distribution network to maximize the value of all parts of the animals it processes. Getting into the U.S. chicken business is a sensible and obvious move, say observers. Shrinking North American cattle numbers mean JBS will not be able to grow its U.S. beef business in volume terms. It will instead focus on efficiencies and adding value. It will likely spend tens of millions of dollars on its plants to do this. A particular focus is on making improvements at its Cactus, Texas, plant to expand production, say observers.

JBS already has plans to strengthen Pilgrim’s business, notably in Mexico. It will also expand JBS’s markets in Russia and the Middle East, says JBS USA CEO Wesley Batista. Pilgrim’s currently operates 28 chicken processing plants in the U.S. and three in Mexico, and eight prepared foods plants. Five more processing plants and three prepared foods plants are currently idle. JBS has left open the possibility of restarting some of these plants, Batista told the Wall Street Journal in September. But its first plans are to improve efficiency at Pilgrim’s currently operating plants, he says.

JBS will have the same intense focus on managing margins in chicken as it has in beef and pork, say observers. It expanded capacity at the former Swift beef plants after buying them in 2007. This helped reduce per-head processing costs. But JBS, like other packers, has cut production to match demand and is focused on managing the price spread between raw materials and selling prices. It will do the same in chicken and will likely only increase production if demand improves.

Pilgrim’s under Chapter 11 appears to have done much of what was necessary to return to profitability. It reported net income of $53.2 million for its fiscal 2009 third quarter ended June 27. This came after four large quarterly losses in a row and came despite smaller sales in the quarter ($1.777 billion versus $2.2 billion a year earlier). Owning Pilgrim’s might give JBS USA the opportunity to increase its beef and pork sales to foodservice accounts, say observers. Only 14 percent of its beef sales and 4 percent of its pork sales went to this sector in 2008. In contrast, 64.8 percent of Pilgrim’s sales in fiscal 2008 went to foodservice, with 22 percent going to retail and 13.2 percent to export. JBS might also guide Pilgrim’s into more prepared foods. They accounted for 35.6 percent of sales in 2008, with 50.7 percent for fresh chicken. Pilgrim’s 2008 sales were $8.525 billion. Sales in the first nine months of fiscal 2009 were down nearly 16 percent from the previous year. So it is likely to end the year with annual sales of about $7.3 billion.

JBS will likely expand its U.S. and Mexican distribution for beef, pork and lamb by using Pilgrim’s network. It operates five distribution centers in the U.S (in Arizona, Texas and Utah) and 18 in Mexico, where Pilgrim’s is the second-largest chicken processor. It has three plants there that can process 3.2 million birds per week.

JBS is likely to keep Pilgrim’s top management as it has proved its ability to improve the company, say observers. Pilgrim’s expects to operate as a separate business unit from beef and pork under the JBS umbrella, said president and CEO Don Jackson in a letter to stakeholders in September. It anticipates little impact on its plants, operations and sales organization. Its growers will continue to supply it, its plants will continue to operate and it will continue to serve its customers. It does not anticipate any additional plant closures, Jackson wrote. Pilgrim’s is positioned to emerge from bankruptcy as a stronger, more efficient competitor. It has returned to profitability, the quality of its asset base has improved significantly and it is gaining additional business, he wrote.

Adding Bertin SA to its Brazilian beef operations means JBS will dominate the industry there even more. It will have capacity to process 43,400 head per day. Bertin will also allow JBS to create the world’s largest leather company and diversify into the dairy industry. Bertin is Brazil’s largest leather exporter. On Aug. 11, JBS said it had set up a subsidiary, JBS Couros, that JBS said constitutes its entry into the industrialization, purchase, sale, import and export of cattle hides and leather.

In fiscal 2008, Bertin had revenues of about 7.5 billion real. It anticipates revenues of 9.4 billion reals ($5.1 billion) in 2009. Established in 1977, it operates 38 production units and employs 28,000 people. It operates in the beef, dairy, leather and pet product segments. With operating units in Brazil, Uruguay, Paraguay and China, Bertin exports products to more than 110 countries. Apart from leather, Bertin will provide JBS with entry into the dairy business. This business accounted for 14 percent of Bertin’s 2008 sales. JBS says it sees potential economies of scale, with estimated synergies of 500 million reals ($276 million) a year. It also expects to see an expansion of distribution channels to retail and foodservice and optimization of the industrial assets due to its geographic synergies, it says.

What’s next?

JBS’s next move might be to expand its lamb business in Australia. It already processes 40,000 to 50,000 lambs per week through its Tasman plants. It also feeds lambs and has about 45,000 currently on feed. Reports in September suggested JBS was in discussion with at least one independent lamb processor. Another target for JBS in Australia is goats, says CEO Iain Mars. JBS is already killing 3,000 goats per week at two plants but plans to kill more and increase goat meat exports.

Meanwhile, Marfrig continued its expansion and diversification in August by agreeing to buy Cargill Inc.’s Brazilian poultry and pork business for $706 million in cash. It will also assume $194 million in debt from Cargill’s Seara Alimentos SA, Brazil’s second-biggest poultry processor. Cargill paid about $130 million for Seara in 2004, says Bloomberg.

Marfrig, also based in São Paulo, apparently moved quickly to agree to buy Seara after talks to merge with Bertin ended in August, say observers. Cargill was carrying out a strategic review of Seara and Marfrig made a sudden offer. After evaluating Marfrig’s proposal and considering current changes in the dynamics of Brazil’s animal protein industry, Cargill realized the combination of Marfrig and Seara would make more sense, says Marfrig.

While JBS has gained much attention in recent years, Marfrig has also expanded rapidly. It made 35 acquisitions in 2006, 2007 and 2008 and has 57 plants in nine countries. It bought OSI’s Brazilian and European operation in July 2008 for up to $900 million in cash and stock.

Marfrig’s operations include beef, pork, lamb and poultry processing and distribution. It has 18 cattle slaughter plants (nine in Brazil, five in Argentina and four in Uruguay), with a combined daily slaughter capacity of 21,100 head per day. It can process 4,200 hogs, 8,400 lambs and 1.7 million chickens per day. In 2008 it processed 2.5 million cattle, 874,000 hogs, 184 million chickens and 320,000 lambs. Marfrig says its acquisition of Seara will add $1.7 billion in annual sales of pork and poultry. It will become Brazil’s largest poultry processor after Brasil Foods.

In September, Marfrig increased its Brazilian beef business in a novel way by leasing 11 plants from the Margen Group and Mercosul SA, Brazil’s eighth- and seventh-largest beef packers, respectively. The plants gave Marfrig another 8,800 head of daily processing capacity and expanded its Brazilian capacity to 22,350 head per day. JBS remains Brazil’s largest beef processor with 26,900 head of capacity.

Meanwhile, watch for Brasil Foods to make a move into the U.S. chicken business. The boys from Brazil continue to reshape the global meat and poultry industry.

Steve Kay is editor and publisher of Petaluma, Calif.-based Cattle Buyers Weekly