Glenboden M & A Originations

Troubled Sadia of Brazil vulnerable to private equity break-up

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Origination Status reports of merger with main competitor, April 2009
Asset Sadia S.A. (Brazil), leading domestic processed food producer and meat exporter
Buyer candidates include CapVest, Permira, Blackstone (private equity firms)
Seller shareholders of Sadia (public company)
Buyer Rationale restructuring opportunity, split of processed foods and meat businesses
Seller Rationale financial problems caused by forex and derivatives losses, low growth in 2009
NBs valuation based on Permira’s acquisition of Unilever’s frozen foods brands in Europe (2006)
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Sadia represents a classic buy-out opportunity, and perhaps in a more favourable credit environment that might already have happened. The group is the no.1 player in several processed foods categories in Brazil; in 2008 it grew sales strongly, had an EBITDA margin of over 10%, and invested a record amount in capex to increase capacity. In the same year, it made a big financial loss, causing its net debt ratio to shoot up. Attempts to save the company through M&A appear misguided.

Domestically Sadia is focused on processed packaged foods …With origins as a meat company, principally poultry, Sadia now derives 80% of its domestic sales from frozen and chilled processed foods, ranging from ready meals to margarine to desserts. It holds the no.1 market position in most categories that it serves in Brazil; its brand is reported to be the most valuable one in that country’s food business.

Domestic sales reached US$ 3 bln in 2008, growing by 13% in volume terms but 26% in value. This average price increase demonstrates the strong position enjoyed by the group and its brand in Brazil.

... but internationally it's a commodity meat exporterIn parallel, nearly half of Sadia’s revenues are from international markets, and the group is Brazil’s biggest exporter of meat. Its sales spread is well balanced across most continents in the world, facilitated by a network of sales offices in various geographies.

Export sales reached US$ 2,5 bln in 2008, growing by 19% in volume terms but 41% in value. This side of Sadia’s business is mostly an unbranded or commodity meat operation, with only 10% of sales being of processed products.

Financial losses have caused a massive increase in net debt ...Financially, the company is healthy in operating terms, with an EBITDA margin of over 10% in 2008. However, owing to unprecedented losses from forex and derivatives, the group made a net loss of nearly US$ 2 bln; this caused Sadia’s net debt to shoot up, from a historical level of under x2,0 EBITDA to nearly x6,0 EBITDA at the end of 2008.

... confirming Sadia's status as a private equity buy-out candidateThese are not the only factors that make Sadia both attractive and vulnerable to a private equity bid.

In 2008 the group invested a record amount in capex, $800 mln, to increase capacity by 30%. The capex plan for 2009 is for less than one-third of this amount. So, Sadia looks like a fully-invested and modernised business in manufacturing terms.

Sadia is also a public company, with quite a broad shareholder base and listings on three national exchanges. Its shareholders are sure to be examining their options at this point, especially when there are no signs that the group will recover organically; its forecast for 2009 is for sales volume growth to fall to 5%, and for the EBITDA margin to drop below 10%.

The group's own M&A initiatives are unconvincing ...As for an M&A route to recovery, Sadia’s main focus appears to be some form of merger or alliance or asset sale, involving its main competitor in Brazil, Perdigao. That might be misguided, in our view; marriages of equals are hard to execute, and anti –monopoly issues are bound to arise in this case.

.... and a split-up of Sadia's two halves makes strategic sense ...In our opinion, a private equity consortium might well acquire Sadia, and then split its domestic, branded processed foods business away from its export, commodity meat division. It’s hard to imagine a strategic investor that would want to buy Sadia as a whole; also, frozen and chilled packaged foods are more the domain of private equity globally, these days.

.... with frozen food producers as buyers for the domestic business ...To the extent they can invest in South America, the private equity firms CapVest and Permira might be prime contenders as buyers. Both have € 2 bln turnover frozen packaged foods businesses in Europe; CapVest in the UK, France and Nordic region (through its FoodVest vehicle), and Permira in the UK and Germany (Igloo and Bird’s Eye brands). Adding Sadia would double this turnover for either of them.

Also, and as we’ve said before, these two frozen foods giants need to expand their geographic footprint as widely as possible, in order to maximize the value of any future exit through public equity market listings. Previously, we’d only considered additional European countries; but why not South America’s biggest geography, Brazil, as an expansion play?

... and a big trading company taking the export divisionSadia’s valuation might need to take into account the commodity nature of its meat export half. Buyers for this business are more likely to be big trading companies, like Cargill, than branded packaged foods players. Unless of course Tyson’s reported interest in Sadia materializes.

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THIS LEAD'S VALUATION
Size (€ mln) 4.600
Sector frozen food
Asset Quality Brazil no.1 branded
Seller large plc
Buyer private equity
P/S 1,1
P/Ebitda 10,0
Type enterprise value estimate
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