Marfrig Sees Lower Debt, Higher Margin on New Units

Marfrig Alimentos SA (MRFG3), Brazil’s second-largest food company, expects the purchase of BRF -Brasil Foods SA brands and processing units will cut debt to less than four times earnings and boost margins, a top executive said.

The debt-to-earnings ratio, at a five-year high of 4.5, may fall further to as low as 2.5 if Marfrig manages to sell logistics assets and a stake in its Seara unit,Joao Sampaio, vice president of institutional affairs, said in an interview today at the Bloomberg office in Sao Paulo. Marfrig will make a July interest payment on 2.5 billion reais ($1.2 billion) of convertible bonds held by the state-owned development bank as scheduled, Sampaio said.

Marfrig, which has shifted from beef to TV dinners, frozen pizzas and other meat products since 2010, is seeking to reduce debt after 20 acquisitions in five years to compete with Brasil Foods for processed products. Marfrig spent $2 billion in 2010 to buy Seara from Cargill Inc. and McDonald’s Corp. (MCD) supplier Keystone Foods, causing debt to quadruple in two years.

“We want to be increasingly seen as a food company not a meatpacker,” said Sampaio, who was Sao Paulo state’s agriculture secretary for four years until May 2011.

The Sao Paulo-based company expects to sell its logistics assets this year after a deal with JSL SA (JSLG3) fell through in March, Sampaio said. Now Marfrig is considering separating the assets into three businesses to make a sale easier, he said. A plan to sell a stake in Seara is also in place, Sampaio said.

Profit Margins

Marfrig rose 0.7 percent to close at 9.55 reais in Sao Paulo. The shares have climbed 12 percent this year, compared with a 1.9 decline in Brazil’s benchmark Bovespa index.

Marfrig expects profit margins to grow after buying 10 processing plants, 12 brands and eight distribution centers from Brasil Foods, the nation’s biggest food company.

The incorporation of all the Brasil Foods assets into Seara by August means the unit’s earnings before interest, taxes, depreciation, and amortization, or Ebitda, will double to between 12 percent and 13 percent of sales in the third quarter from about 6 percent in the first, Sampaio said.

Sao Paulo-based newspaper Valor Economico had reported on May 25 that the company was in talks to postpone coupon payments of as much as 270 million reais on the bonds held by the development bank, known as BNDES.

Asset Sales

Chief Executive Officer and founder Marcos Molina dos Santos, who opened his first slaughterhouse in 2000, is seeking to sell assets this year after acquisitions to turn Marfrig into a food processor led debt to surge.

In April, Marfrig concluded the sale of U.S. and European distribution units to Illinois-based Martin-Brower Co. for $400 million.

In March, Brazilian logistics company JSL canceled plans to buy Marfrig’s distribution centers and fleets of refrigerated trucks and vans that transport goods to clients and between plants.

Brasil Foods is also the world’s largest poultry exporter. Marfrig is Latin America’s biggest beef producer after JBS SA. (JBSS3)

To contact the reporter on this story: Lucia Kassai in Sao Paulo at lkassai@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net

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