Billionaire Abilio Diniz, poised to become chairman of BRF-Brasil Foods (BRFS3) SA, has investors betting he’ll steer the country’s top foodmaker toward an overseas expansion and boost profit margins.
Diniz, who as chairman of Cia. Brasileira de Distribuicao Grupo Pao de Acucar used acquisitions to turn the retailer into the country’s largest, is set to be elected head of Brasil Foods’ board tomorrow after winning support from two of the top three shareholders, according to investors and analysts.
Brasil Foods investors are tapping Diniz, 76, to help the company resume growth after the $3.8 billion takeover of Sadia SA in 2009 led antitrust authorities to demand asset sales. The tycoon will probably help the Sao Paulo-based maker of TV dinners and yogurt cut costs and improve efficiency, according to Goldman Sachs Group Inc. analyst Luca Cipiccia.
“I see the presence of Mr. Diniz favorably,” said Frederico de Castro, an analyst at Sao Paulo-based Perfin Investimentos, which manages 2.6 billion reais ($1.3 billion) including Brasil Foods shares. “He will help develop a more ambitious growth agenda.”
Brasil Foods reported net income of 562.8 million reais in the fourth quarter, beating the 428.1 million-real average of seven analysts’ estimates compiled by Bloomberg. Sales rose 13 percent from the previous quarter. Earnings before interest, taxes, depreciation and amortization, or Ebitda, have fallen to 8.2 percent of sales in 2012 from 11 percent the previous year.
Brasil Foods is up 5.5 percent this year in Sao Paulo and trades at 21 times estimated earnings, compared with a 6.6 percent decline and a ratio of 12 for Marfrig Alimentos SA (MRFG3), the country’s second-biggest processed foods maker. It has buy recommendations from 11 of 20 analysts surveyed by Bloomberg, up from eight before Diniz was nominated to the board on Feb. 21. Four analysts have a hold rating and five recommend selling.
Brasil Foods declined to comment on changes to its board and its growth plans in an e-mailed response to questions.
Diniz’s nomination has led Pao de Acucar’s controlling shareholder Casino Guichard-Perrachon SA to ask him to leave the supermarket chain’s board to avoid conflicts of interest. Diniz said he plans to keep both jobs, adding he has the right to remain as part of a 2005 accord with the Saint-Etienne, France-based retailer.
Corporate governance advisers Glass Lewis & Co. recommended Brasil Foods shareholders vote against Diniz's appointment because the foodmaker is Pao de Acucar's largest supplier and the retailer is its biggest client.
Brasil Foods Chief Executive Officer Jose Antonio Fay, who has said since 2009 that the foodmaker would seek an international expansion, so far hasn’t made any major acquisition abroad as the company focused on reducing debt from the purchase of Sadia.
“At this point the company needs someone with a different perspective,” Perfin’s Castro said. “Diniz seems like a good choice.”
Under Diniz, Pao de Acucar increased sales 25-fold in two decades and tripled profit margins after 13 takeovers including Extra hypermarkets, Casas Bahia furniture stores and the Ponto Frio consumer electronics chain. The son of founder Valentim Diniz, he has been the chairman of Pao de Acucar since 2003 after eight years as chief executive officer.
The challenge of being chairman of two of Brazil’s largest companies at the same time and the difficulties involved in big acquisitions means Diniz may not be able to execute as much as shareholders expect, said Nick Robinson, a portfolio manager who helps manage $15 billion of Latin American shares at Aberdeen Asset Management Plc, including Brasil Foods.
Conflict of Interest
“It’s going to be quite tough to execute,” Robinson said in a telephone interview from Sao Paulo. “There’s a bit of a question over a potential conflict of interest with Diniz becoming chairman of both companies and over how he’s going to be able to do those two jobs at the same time.”
Diniz won support from two of Brasil Foods’ three biggest shareholders -- Banco do Brasil SA (BBAS3) employees’ Previ pension fund, which holds a 12.19 percent stake, and private-equity fund Tarpon Investimentos SA (TRPN3), three people who asked not to be identified because the talks are private, said in February.
Petroleo Brasileiro SA (PETR4) workers’ Petros pension fund, the foodmaker’s largest shareholder with a 12.22 percent stake as of Dec. 31, sees no need for major changes at Brasil Foods and will decide on its stance on the nomination at the meeting tomorrow, Carlos Fernando Costa, the fund’s investor director, told newspaper Valor Economico in an interview last week.
Officials at Tarpon and Petros didn’t return calls and e- mails seeking comment. Previ and a firm representing Diniz declined to comment in e-mailed responses to questions. A spokeswoman for Casino declined to comment.
Diniz is said to have spent about 1 billion reais buying Brasil Foods shares, a person with direct knowledge of the matter, who asked not to be named because the numbers aren’t public, said in February.
Diniz’s net worth was $3.7 billion as of last month, according to Forbes.
At Brasil Foods, a supplier of processed food products to Pao de Acucar, Diniz will probably seek to increase capacity use and reduce maintenance spending at 61 plants in Brazil, five in Argentina and two in Europe to improve margins, Castro said. He’s also likely to use Brasil Foods’ Sadia and Perdigao meat and dairy brands for other products to boost sales, Castro said.
“Abilio Diniz, who has vast experience in food retailing, may in our view accelerate” profitability gains at Brasil Foods, Goldman Sachs’s Cippicia, who has a buy recommendation for the stock, said in an April 1 report.