No one in the early 2000s could possibly have imagined that Brazil’s two largest beef companies would eventually own or control two of the U.S.’s four largest companies. Yet that is about to occur when Marfrig Global Foods completes its U.S. $969 million acquisition of 51 per cent of National Beef Packing. The latter is the fourth-largest U.S. beef processor and arguably its most profitable in terms of per head margins. Marfrig will hope this performance continues, as it is paying a hefty premium for its majority share in National.
The Brazilian invasion of North America began in 2007 when JBS SA acquired Swift and Company. JBS later acquired the Smithfield Beef Group and then XL Foods in Western Canada, including its large plant in Brooks, Alta. One quirk of Marfrig’s proposed acquisition of National is that JBS in 2008 agreed to acquire 100 per cent of National for US$970 million. But the Justice Department blocked the deal and JBS in February 2009 terminated the deal.
A combined Marfrig-National will be the world’s fourth-largest beef processor in terms of sales. That’s contrary to what Marfrig and news reports on April 9 said, with Marfrig claiming it would become the second largest with annual sales of more than US$13 billion. But Tyson Foods’ beef segment, which operates strictly in the U.S., had sales in fiscal 2017 of US$14.823 billion. Cargill, which operates primarily in the U.S., Canada and Australia, has global beef sales somewhat less than Tyson but more than US$13 billion. So a combined Marfrig-National will be fourth in sales behind Tyson and Cargill, with JBS SA first.
Marfrig in terms of annual cattle slaughter will likely also be third behind JBS and Cargill. JBS globally processed about 17.5 million head last year, while Cargill processed 8.5 million head. Marfrig is the second-largest beef processor in South America behind JBS. It is second largest to JBS in Brazil and Uruguay’s leading processor. It has 31 beef plants in Brazil, Uruguay and Chile, which have the capacity to process up to 4.7 million cattle per year. A combined Marfrig-National will mean a capacity of 8.3 million head, it says. It’s hard, though, to see how Marfrig comes up with this number. National processed 3.11 million head in 2016 and perhaps 3.3 million head in 2017.
Marfrig’s announcement regarding National came as little surprise. Leucadia National Corporation, which has owned 79 per cent of National since 2011, indicated in January it was mulling a sale of part or all of that stake. This was to take advantage of two consecutive years of record earnings by National. Speculation at the time was that Leucadia might look for a buyer outside the U.S. That is exactly what has happened. Leucadia says it will sell 48 per cent of National to Marfrig. Marfrig has also agreed to acquire a further three per cent of National from other shareholders so that it will own 51 per cent of National, says Leucadia. Other owners remain producer group U.S. Premium Beef (which owns 15.1 per cent), with two other entities holding the final three per cent. National president and CEO Tim Klein will continue in these positions after completion of the deal.
In unusually frank comments along with the announcement of the deal, Leucadia acknowledged the challenge of owning a beef company. National is an outstanding company but was too large and concentrated of an investment for Leucadia, says CEO Rich Handler and president Brian Friedman. That’s not the first time that investment firms, private or public, have discovered just how complicated and demanding a large beef processing business is.