JBS and Marfrig announced the transaction June 10; the deal is subject to approval by regulatory authorities. The deal also includes the Zenda tannery unit in Uruguay. The purchase would see JBS, which had total debt of R$21.2 billion ($9.94 billion) at the end of last quarter, overtake Springdale, Ark.-based Tyson Foods Inc. as the top poultry producer globally.
In its review, Fitch focused on the benefits to JBS from increased diversification compared against the risks of taking on more debt. As part of the deal, JBS would assume R$5.85 billion ($2.9 billion) of Marfrig's bank debt.
Additionally, Fitch expects Seara's free cash flow generation to be negative during 2013. While Fitch previously expected JBS to generate positive free cash flow this year, the Seara acquisition and the investments needed to integrate the business will likely lead to negative free cash flow generation for JBS in 2013 and possibly 2014.
"A downgrade could be precipitated by a weakening of the company's leverage metrics and cash flow generation as expected upon closing of the transaction," the ratings agency said. "The rating could be removed from Negative Watch and stabilized if the capital structure of JBS pro forma for this transaction turns out to be less leveraged than anticipated. Operational improvements and synergies from the transaction would be positive, as would an equity injection."