Diniz Pays Premium in Quest for Brasil Foods: Corporate Brazil

Brazilian billionaire Abilio Diniz, vying to become chairman of BRF-Brasil Foods SA, is paying the highest premium in at least 2 1/2 years to gain influence with shareholders.

Diniz, who ceded control of retailer Cia. Brasileira de Distribuicao Grupo Pao de Acucar to Casino Guichard-Perrachon SA last year, sold 1.5 billion reais ($753 million) worth of Pao de Acucar non-voting shares on Jan. 11 and bought 1 billion reais of Brasil Foods stock, according to a person with direct knowledge of the matter, who asked not to be named because the numbers aren’t public. Brasil Foods, the nation’s largest processed-food maker, trades at 99 times its trailing 12-month earnings, almost four times Pao de Acucar’s ratio of 25. The spread between them reached a 2 1/2-year high on Jan. 23.

The investment in Brasil Foods coincides with talks for Diniz to become chairman, three people with knowledge of the matter said. Diniz, 76, is seeking to increase his clout in Brazil’s corporate community after last-minute attempts failed to undo a deal to sell control of Pao de Acucar to Casino.

“Pao de Acucar is cheaper than BRF, has more growth potential and is one of our top 10 picks for this month,” said Jose Francisco Cataldo Ferreira, an analyst at Agora CTVM S/A. Pao de Acucar, as Brazil’s largest retailer, has a competitive advantage in food sales and durable goods such as electronics, he said.

“BRF is also a good company, but its shares are already expensive and its financial situation is less comfortable,” Ferreira said.

Shareholder Support

Diniz, who remains Pao de Acucar’s chairman, won support from two of Brasil Foods’ three biggest shareholders: Banco do Brasil SA’s employee pension fund, Previ, which holds a 12.4 percent stake, and private-equity fund Tarpon Investimentos SA, said the three people, who asked not to be identified because the talks are private. Brasil Foods Chairman Nildemar Secches said Feb. 1 he won’t seek another term.

Petros-Fundacao Petrobras de Seguridade is the second-biggest shareholder with a 10.12 percent stake, data compiled by Bloomberg show. Petros declined to comment on whether it supports Diniz as chairman.

Diniz said in a statement he sold Pao de Acucar shares to diversify his investments. Diniz declined to comment on how he spent the money, according to his office. Pao de Acucar, Brasil Foods, Previ and Tarpon also declined to comment.

Potential Conflict

To achieve his goal, Diniz will have to convince Pao de Acucar’s controlling shareholder Saint-Etienne, France-based Casino that he can hold both jobs. There’s a potential conflict of interest because Pao de Acucar is a major Brasil Foods’ client, said Henrique Kleine, an analyst at Magliano SA Corretora de Cambio & Valores Mobiliarios.

After Diniz’s public fight with Casino to retain control of Pao de Acucar last year, the French retailer may use the opportunity to try to push the Brazilian billionaire out of Pao de Acucar and cause both stocks to fall, Kleine said, adding that the relations between Diniz and Casino Chairman and Chief Executive Officer Jean-Charles Naouri aren’t good. Casino declined to comment.

“You could have a conflict of interest and a competition issue here,” Kleine said by telephone from Sao Paulo, adding that Pao de Acucar also has a private label for dairy products, margarine and pasta like Brasil Food does. “Minority shareholders don’t like to be caught in the crossfire of majority investors.”

Meeting Today

Pao de Acucar has rallied 26 percent in the past year, topping Brasil Foods’ 24 percent gain. That compares with a 9.6 percent drop for Brazil’s benchmark Bovespa index. Pao de Acucar rose 0.7 percent to 93.91 reais at 10:31 a.m. as Brasil Foods gained 1 percent to 42.84 reais.

Casino asked Diniz to explain his Brasil Foods’ plans in a meeting today for shareholders of Wilkes Participacoes SA, Pao de Acucar’s holding company, said a person with knowledge of the matter. The French firm said it sees a conflict of interest and asked Diniz to leave Pao de Acucar’s board if he becomes Brasil Foods chairman, the person said, adding that Casino will go to court if needed. Casino, Diniz and Naouri declined to comment.

Under Brazilian legislation, a person can’t simultaneously serve on the board of companies that are competitors or that have a conflict of interest, unless shareholders approve it in an official meeting. CVM, the Brazilian capital markets regulator, and Cade, Brazil’s antitrust regulator, said they wouldn’t comment on any specific case.

Portuguese Immigrant

Casino took control of Pao de Acucar on June 22 following the completion of an agreement signed between the French retailer and Diniz in 1999 and amended in 2005.

Diniz, whose father, a Portuguese immigrant, founded Pao de Acucar as a bakery in 1948, still has a 3 billion-real stake in the company, one of the people said.

Analysts favor Pao de Acucar. The stock has 15 buy ratings and zero sell recommendations, while eight analysts recommend buying Brasil Foods and four say sell, data compiled by Bloomberg show.

“Pao de Acucar shares are very resilient and also shareholder-conflict proof,” Julia Monteiro, an analyst at Caixa Geral de Depositos SA, said in a telephone interview from Rio de Janeiro, adding that the stock continued to gain even during the dispute last year between Diniz and Casino. The company is also on her list of top picks.

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