How Brazil's Bribery Scandal Could Make the Havaianas Brand a BargainBy
Havaianas maker may soon be up for sale amid J&F graft scandal
‘It could be worth so much more,’ Eleven specialist says
Havaianas, those colorful Brazilian flip-flops worn by the likes of Kim Kardashian and Gwyneth Paltrow, don’t always come cheap. But for investors starting to warm up to Brazil’s M&A market, the company may soon look like a bargain.
As a non-core asset, the trendy sandal-maker officially known as Alpargatas SA is likely to be among the first to hit the chopping block should parent company J&F Investimentos SA need to raise quick cash after its controlling shareholders admitted to paying bribes in Brazil. It wouldn’t be the first time. The company’s last owner -- builder Camargo Correa SA -- put it up for sale less than two years ago for the exact same reason.
That run of bad luck aside, Alpargatas is well-managed and a new owner might be just what it needs to finally break out, said Gustavo Gato, a portfolio manager at Explorador Capital Management, whose assets under management include Alpargatas shares. While Havaianas’ footwear sits atop the global flip-flop food chain, with a Swarovski-encrusted pair retailing for $70 at Saks Fifth Avenue, the company’s stock trades at just 12 times its estimated 12-month earnings, compared with a median of almost 19 times for 100 global peers. The company, which has a market value of $1.72 billion, is led by Chief Executive Officer Marcio Utsch.
For investors, the scandal at J&F is a whole lot of “noise” that has hurt the shares, said Gato. “Alpargatas has one of the best management teams in the industry. It’s an incredible company. Even in the midst of crisis, it’ll be able to find a buyer.”
Alpargatas said it doesn’t comment on market speculation in an e-mail sent by external press officials. J&F said in an e-mail it’s not selling any of its assets.
Market conditions have improved since the last time the company was put up for sale. After a punishing two-year recession, Brazil’s mergers and acquisition market is picking up. Completed and pending acquisitions in Latin America’s biggest economy have reached $17.3 billion so far this year, up about 60 percent from the same period a year earlier, according to data compiled by Bloomberg. Even so, the scandal that’s pushing Alpargatas toward a sale also could delay Brazil’s rebound and derail some deals.
Less than a year after President Dilma Rousseff was impeached amid the spreading corruption scandal known as Carwash, her successor Michel Temer faces threats of a similar fate. Tensions started heating up again after Joesley and Wesley Batista, whose family controls J&F, admitted to crimes of corruption and gave prosecutors an audio recording in which Temer allegedly appears to be endorsing a payment of hush money to a jailed politician. The revelations sent markets reeling and prompted both S&P Global Ratings and Moody’s Rating Service to warn of possible credit grade cuts on concern Temer’s reform agenda will fail.
“The M&A market had heated up, but that came to a halt in recent weeks while investors try to understand what’s happening,” said Ricardo Melare, a partner who specializes in mergers and acquisitions at the ASBZ law firm in Sao Paulo. “At the height of the political crisis, the market took the foot off the accelerator.”
The Batista brothers agreed to buy control of Alpargatas in late 2015 using a 2.67 billion-real ($816 million) loan from government-owned Caixa Economica Federal in a deal that’s being investigated by the country’s audit court. The financing’s timing and terms gave J&F, which now holds a 21 percent stake in Alpargatas, an advantage over rival bidders because it allowed the company to pay entirely upfront in cash.
J&F’s purchase of Alpargatas helped Camargo Correa weather the fallout after it was roped into the corruption investigation at state-run oil giant Petrobras and Centrais Eletricas Brasileiras SA’s nuclear-power unit Eletronuclear. The construction firm was forced to unload assets after it agreed to pay about 800 million reais to Brazil’s antitrust agency Cade in agreements related to the two cases.
Now, J&F is seeking a leniency agreement and may have to unload assets as Brazil prosecutors ask for as much as 11 billion reais in fines. The agreement is still being negotiated and there is a separate process underway with the U.S. Department of Justice.
A new sale could be the next best step for Alpargatas and its Havaianas brand, said Daniela Bretthauer, a retail specialist at Eleven Financial in Sao Paulo. The company’s regular rubber-and-plastic flip-flops usually sell for anywhere from $15 to $25 a pair.
“The brand itself is a success,’’ she said. “It could be worth so much more.”
— With assistance by Gerson Freitas Jr, and Eduardo Thomson