Deal Overview
On May 11, 2017, Marfrig Global Foods (OTC US: MRRTY, $1.95, Market Capitalization $1.2 billion), Brazil’s second-largest beef producer, announced its plans to carve out a portion of its holdings in Keystone Foods Holdings LLC in the United States. Keystone is a subsidiary of Marfrig Global that supplies chicken products to major fast food chains, including McDonald’s. The company has already confidentially submitted a draft registration statement (Form F-1) with the U.S. Securities and Exchange Commission (SEC) corresponding to the proposed IPO transaction. However, the timing and the tax nature of the transaction depend on satisfaction of several customary conditions, including SEC’s review process and market conditions, among others. Keystone plans to use the proceeds to finance growth and for general corporate purposes.
The stock reaction was lukewarm with only 0.9% uptick in the share price to R$7.69 on the date of the announcement. However, the share price reflected the value-unlocking potential of the separation with stock jumping 37% in the month just before the form F-1 filing announcement on 5/11.
Deal Rationale
Marfrig’s move to carve-out a portion of its stake in Keystone does not come as a surprise as the company is saddled with debt due to its prior acquisitions (including that of Keystone in 2010) and has been talking about IPO/divestiture for the last three years. The announcement follows the company’s sale of its entire Moy Park business unit (the largest producer of poultry in the United Kingdom) in June 2015 for $1.5 billion. It is worth noting that the market was anticipating the potential Keystone IPO resulting in a one-month share price rally of 37% as of 5/11, the date of announcement.
In addition to deleveraging Marfrig, the transaction is expected to unlock significant shareholder value for Marfrig as the separation would lead to multiple expansion for Keystone to converge with its industry peers (~11.0x 2017e EV/EBITDA vs. current multiple of 9.0x). However, it remains to be seen how much does the company offload in this IPO and to what extent the transaction helps the company deleverage. Some of the historical divestitures (Keystone Logistics, Seara, Moy Park) of Marfrig in last 6 years were not productive in deleveraging the balance sheet as the company still has a high debt level with a high net leverage ratio of 4.1x in 1Q17.
As a stand-alone company, Keystone is well positioned to capitalize on its continued profitability and volume growth (as against the lackluster performance of Beef segment of Marfrig). The subsidiary recently reported net revenue of $667 million, up 7% YoY, driven by volume growth of 5% in 1Q17, and adjusted EBITDA margin improved 30 bps YoY to 9.4%. But revenue from the beef division was down 18% YoY in 1Q17 and adjusted EBITDA slipped 230 bps to 6.7%. The separation would allow both the companies to focus on their respective niche areas and provide flexibility to capitalize on distinct growth opportunities.
Company Description
Marfrig Global Foods (Parent)
Marfrig Global Foods (OTC US: MRRTY), is one of the world’s largest producers of animal protein food products. With production, sales and distribution units located in 12 countries, Marfrig is one of Brazil’s most international and diversified food companies. The company comprises two operating segments: Marfrig Beef and Keystone. Marfrig Beef segment is mainly responsible for the slaughter, manufacture, distribution, import, export and marketing of beef and lamb meat, while the Keystone division produces and develops multi-protein foods to serve global restaurant chains, including McDonald’s, Subway, ConAgra Foods, Campbell’s Soup, KFC, Taco Bell, Wendy’s, Heinz, and Burger King, among others. The company has a strong presence in four continents, namely the Americas, Asia, Europe and Oceania, with 48 commercial production and distribution units across the globe. The company reported revenue of R$19.3 billion ($5.6 billion) in 2016 and has employee base of 29,200.
Keystone Foods (Carve-Out)
Founded in 1956 and based in West Chester, Pennsylvania, Keystone Foods LLC is a global food services company that supplies animal protein products, including poultry, beef, fish and pork. The company offers ready-to-cook, breaded, and par-fried poultry products, including tenders, fillets, patties, wings, and nuggets; fresh poultry and deli rotisserie that include whole chickens without giblets and cut-up chicken; and protein products. It serves quick-service restaurant, retail, and commercial and consumer product customers. The company has manufacturing facilities across North America, the Asia Pacific, the Middle East, and Africa. The company has more than 11,000 employees and reported net revenue of $2.7 billion in FY16.
