Sigma IPO Seen Boosted on Joint Bid for Campofrio

Alfa SAB’s plan to sell stock in its Sigma Alimentos food unit is getting a boost from a $970 million joint takeover offer with a Chinese partner for Spanish meat processor Campofrio Food Group SA.

Sigma’s decision to work with Shuanghui International Holdings Ltd. after first pursuing Campofrio on its own signals that bids won’t go too high, according to Banco Santander SA and Metanalisis SA. Shuanghui, which bought the world’s largest pork producer last year, owns 37 percent of Madrid-based Campofrio.

The Sigma-Shuanghui proposal, unveiled on Dec. 23, valued Campofrio at 6.90 euros a share after the Mexican company said it would pay 6.80 euros. Alfa Chief Financial Officer Ramon Leal said Nov. 14 the company was studying an initial public offering for Sigma to cut debt from a Campofrio purchase, which would be the business’s first European acquisition.

“This makes them a more global company, which is even more interesting for an IPO,” Gerardo Copca, a Metanalisis analyst with a buy recommendation on Alfa, said by telephone. “The alliance gives an extra boost to Sigma because it means they’ll avoid a price war and benefit from their new partner’s experience. There’s less risk.”

A Sigma IPO would follow on a record year for Mexican stock sales, which reached $12.3 billion from IPOs and secondary offerings in 2013, according to data compiled by Bloomberg. San Pedro Garza Garcia, Mexico-based Alfa sold stock in its chemicals unit, Alpek SAB, in April 2012.

Alfa, Alpek

While Alpek gained only 8 percent from the IPO through Dec. 31, Alfa almost doubled, and a 34 percent surge in 2013 made the parent company the sixth-best performer among 35 stocks on Mexico’s benchmark IPC index. The shares fell 0.4 percent to 36.46 pesos at the close in Mexico City as Mexican indexes slumped.

Campofrio investors signaled that they expect the deal to go through: The stock closed Dec. 31 at 6.90 euros, valuing the company at 705 million euros. The shares closed at 6.91 euros today.

Alfa -- whose other businesses include auto parts, telecommunications and oil and gas -- isn’t providing additional details about a possible Sigma IPO, said Enrique Flores, a spokesman. Sigma is Mexico’s top producer of packaged cheese and processed meats, and Campofrio makes cured hams, hot dogs and sausages.

The offer for Campofrio needs Spanish regulatory approval before Sigma and Shuanghui can proceed.

Freed from the need to buy Shuanghui’s Campofrio holdings, Sigma would only have to spend about 116 million euros more for the remaining shares after buying a stake of more than 45 percent for about 310 million euros in 2013, Santander analysts led by Luis Miranda said in a Dec. 24 report.

Less Risk

“First, it eliminates the risk of a counteroffer from Shuanghui,” wrote Miranda, who rates Alfa as hold. “Second, it reduces the financial requirements for Sigma.”

The alliance with Hong Kong-based Shuanghui also gives Sigma “a very solid player in the protein industry with a strong knowledge of the Asian market, which could open new opportunities,” according to the Santander report.

Shuanghui closed in September on a $4.7 billion purchase of Smithfield Foods Inc., the world’s largest pork processor. The Chinese company declined via an e-mailed statement to comment on the Campofrio bid.

While Alfa would still need to sell shares in Sigma to reduce debt at the unit, a lower financial burden from the Campofrio purchase might shrink the size of an IPO, according to Fernando Bolanos, an analyst at Monex Casa de Bolsa in Mexico City with a hold rating on Alfa.

Smaller IPO?

“We would expect either that the share sale will be for a smaller amount or that they would have more capital for other operations the company might be looking at,” Bolanos said by phone. “They could use it to buy another company or invest in another project.”

Bolanos estimated before the Shuanghui agreement that Alfa would raise about 11.4 billion pesos ($871 million) in a Sigma IPO. He hasn’t updated his projection, and Alfa hasn’t given a size for a Sigma offering. Alfa’s market value as of Dec. 31 was 188.3 billion pesos.

Leal, the Alfa CFO, said in November that a solo bid for Campofrio would have pushed Sigma’s net debt to 3.4 times earnings before interest, taxes, depreciation and amortization, a profit measure known as Ebitda. The ratio was 1.8 times as of Sept. 30, the second highest of Alfa’s operating units after its auto-parts business.

Narrower Margins

Fitch Ratings revised Sigma’s outlook to negative on Nov. 14, and Moody’s Investors Service followed a day later, citing an increase in leverage if the deal went through and smaller profit margins at Campofrio.

Ebitda at the Spanish company was 7.8 percent of third-quarter sales, compared with 13.4 percent for Sigma. Campofrio said Nov. 11 that Ebitda fell 3.7 percent during the first nine months as raw-materials costs rose.

Campofrio had 1.92 billion euros in revenue for the 12 months ended Sept. 30, and Sigma’s total was $3.72 billion in the same period, according to Alfa.

Sigma estimates that pork prices will fall in Europe in the years ahead, boosting Campofrio profits, CFO Ricardo Doehner said in November. The purchase also would let Sigma sell its products in Europe and distribute Campofrio’s offerings more widely in the U.S., he said.

“The geographic diversification is attractive, and Campofrio is well positioned to benefit from the European recovery,” Julio Cesar Martinez, an analyst at Signum Research with a buy recommendation on Alfa, said by phone from Mexico City. “Sigma is one of Alfa’s more indebted units, and all the incentives remain aligned for the IPO to happen in 2014.”

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