Sadia and Perdigao A Brasilian Food Superpower
Feb 06, 2016
Sadia and PerdigaoA Brasilian Food Superpower
Mandate
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How should Perdigao approach the merger with Sadia
Moving ForwardStrategic RationaleValuation
Recommendation
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Offer a swap ratio of 0.27 shares per Common Sadia shareOffer swap ratio of 0.22 per NC and Preferred share
Will result in first year accretion of $1.81
Rationale
Post-Merger Snapshot
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Perdigao (Now)
• EBITDA of• Player if the
agribusiness• Select product
segments
Brazil Foods SA (Post-Merger)
• EBITDA of• Dominate leader in
Market• Compete across varied
product segments• Take advantage of
scale
Brazil: Growth in Agribusiness
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Brazil is the dominate agribusiness environment
• Lower input costs• Specialized Labour & climate• Conducive Exchange rate
Increasing World Consumption
• Poultry and Pork (8%) - Beef (4%)
Scale is the key success factor
• Very competitive and concentrated industry
There is a growing Food industry with a focus on scale
The Benefits of the Merger
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• Dominate across several segment• Widen product offering• Leverage Sadia’s brand power
Brazil Foods becomes the Market Leader
• 3 Billion in synergies• Lower sales expense and SG&A expenses• Cost savings from distribution and production
Take advantage of scale
• Inspire sense of national pride• Ability to efficiently on the international level • Stave off foreign competition
National Champion
A merger would create a leading company for Brazil
Why is ‘Now’ the Ideal Time?
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Avoid Foreign Bidders
Lower amount of buyers ‘First Mover’ advantage on Sadia
Prices are low due to the financial crisesLow amount of bidders Poor financing conditions for M&A
Sadia is in a weak positionOn the brink of bankruptcy Losses due to poor hedging
Now is the ideal time to merge to have the best return
The Decision to Merge
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Become Market Leader
Capitalize on Scale
Sadia in a weak position
Merge Now
Valuation
Valuation Overview
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Pro Forma
Accretion/Dilution
ValuationDCF Share Swap Ration
ProjectionsSadia Income Statement Sadia Cash Flow
Sadia Standalone
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Interest expenses creates a drag on Sadia earnings
Sadia Standalone Income Statement2007 2008 2009 2010 2011 2012 2013
Net Sales 8,708 10,729 11,802 12,982 14,280 15,708 17,279Growth 23% 10% 10% 10% 10% 10%
COGS 6,312 8,109 8,920 9,812 10,793 11,872 13,060Gross Profit 2,396 2,620 2,882 3,170 3,487 3,836 4,220Selling Expenses 1,464 1,727 1,872 2,060 2,266 2,492 2,741G&A 114 159 172 190 209 229 252Other Income (Expense) (83) (38) 0 0 0 0 0EBIT 735 696 837 921 1,013 1,114 1,226Interest Income (Expense) 132 (3,892) (467) (276) (202) (144) (99)Income Tax (100) 703 74 129 162 194 225Other 1 10 0 0 0 0 0Net Income 768 (2,483) 444 774 974 1,165 1,352
Sadia Cash Flow Statement2009 2010 2011 2012 2013
Net Income 444 774 974 1,165 1,352Less: Change in WC 161 177 195 214 236Add: D&A 708 779 857 400 700Cash from Operations 991 1,376 1,636 1,351 1,817
Capital Expenditures 500 200 400 400 700Investing Activities (500) (200) (400) (400) (700)
Debt Repayment 4,164 1,126 939 664 577Equity IssuanceFinancing Cash Flow (4,164) (1,126) (939) (664) (577)
Beg Cash 3,509 (164) (114) 183 470Change in Cash (3,673) 50 297 287 540Ending cash (164) (114) 183 470 1,010
Sadia Standalone – Cash Flow
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Sadia will be hard pressed to finance debt repayments
Valuation – Sadia WACC
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Sadia WACC estimated to be roughly 10.8%
Sadia WACCCost of Debt 7.2%Tax Rate 20%Tax Effected Cost of Debt 5.8%Target Debt Weight 65%
Risk Free Rate 2.87%Levered Beta 1.57Market Risk Premium 5.65%Country Risk Factor 2.57%Default risk 5.7%Cost of Equity 20%Target Equity Weight 35%
WACC 10.8%
Levered BetaUL Beta 0.63Target debt 0.65Target Equity 0.35Target D/E 1.86Tax Rate 20%Levered Beta 1.57
Sadia Discounted Cash Flow2009 2010 2011 2012 2013 Terminal
EBIT 837 921 1,013 1,114 1,226Less: Cash Taxes 167 184 203 223 245NOPAT 670 737 810 892 981Plus: D&A 708 779 857 400 700Less: Capex 500 200 400 400 700Less: Change in WC 161 177 195 214 236FCFF 717 1,139 1,073 677 745 11,948
PV Factor 90% 82% 74% 66% 60%PV FCFF 647 928 790 450 447 7,171
Valuation – Sadia DCF
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D&A assumption is adjusted to reflect lower capital spending
Valuation – Swap Ratio
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Total Share issuance of roughly 160 million
ValuationPV 2009-2013 3,263PV Terminal 7,171Enterprise Value 10,433Less: Debt 8,549Plus: Cash 3,509Equity Value 5,393
Swap RatiosCommon Shares % 37%Common Equity Value 2,019Common Per Share 8.01Current Share Price 4.58Perdigao 30day Avg Price 29.50Common Swap Ratio 0.27Shares Issued for common 68.47
Preferred Shares % 63%Preferred Equity Value 3,374Preferred Per Share 6.41Current Share Price 3.28Preferred and NC Ratio 0.22Shares Issued for NC and Pref 91.51
Proforma
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Very accretive deal for all shareholders
Proforma Combined Income Statement2007 2008 2009 2010 2011 2012 2013
Gross Sales 17,698 25,353 28,100 31,376 35,050 39,171 43,797Deductions 2,357 3,231 3,623 4,055 4,540 5,085 5,699
Net Sales 15,341 22,122 24,477 27,322 30,510 34,086 38,098COGS 11,072 16,743 18,525 20,678 23,092 25,799 28,836
Synergies 150 150 150 150 150Gross Profit 4,269 5,379 6,102 6,793 7,568 8,437 9,412Selling Expenses 2,743 3,618 4,062 4,535 5,064 5,657 6,323
Synergies 5% 5% 5% 5% 5%G&A 90 159 342 381 426 476 532
Synergies 20% 20% 20% 20% 20%Other Income (Expense) 5 (262) 0 0 0 0 0EBIT 1,441 1,340 1,970 2,181 2,417 2,682 2,980Interest Income (Expense) (105) (630) (735) (470) (341) (213) (116)Income Tax (32) 255 541 530 552 579 619Other (50) (17) 0 0 0 0 0Net Income 1,254 948 1,776 2,241 2,628 3,049 3,483Shares Out 367 367 367 367 367EPS 4.84 6.11 7.16 8.31 9.49Accretion/Dilution 1.81 2.05 2.11 2.07 2.07
Proforma Debt
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Very accretive deal for all shareholders
Proforma Combined DebtPerdigao Debt 2009 2010 2011 2012 2013Beginning 5,364 3,718 2,851 1,871 480Repayment 1,646 867 980 1,391 373Ending 3,718 2,851 1,871 480 107Interest 267 193 139 69 17
Sadia Debt 2009 2010 2011 2012 2013Beginning 8,549 4,385 3,259 2,320 1,656Repayment 4,164 1,126 939 664 577Ending 4,385 3,259 2,320 1,656 1,079Interest 467 276 202 144 99
Combined 2009 2010 2011 2012 2013Beginning 13,913 8,103 6,110 4,191 2,136Repayment 5,810 1,993 1,919 2,055 950Ending 8,103 6,110 4,191 2,136 1,186Interest 735 470 341 213 116
Proforma Cash Flow
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Merged company will be able to support debt repayment
Proforma Cash Flow2009 2010 2011 2012 2013
Net Income 1,776 2,241 2,628 3,049 3,483Less: Change in WC 322 354 389 428 471Add: D&A 1,469 1,639 1,831 2,045 2,286Cash from Operations 2,923 3,526 4,069 4,665 5,298
Capital Expenditures 1,000 700 900 900 1,200Investing Activities (1,000) (700) (900) (900) (1,200)
Debt Repayment 5,810 1,993 1,919 2,055 950Equity IssuanceFinancing Cash Flow (5,810) (1,993) (1,919) (2,055) (950)Beg Cash 5,485 1,812 1,862 2,159 2,446Change in Cash (3,887) 833 1,250 1,710 3,148End Cash 1,598 2,646 3,112 3,869 5,593
Implementation
Implementation
Spin-off
Regulatory option Secondary beneficial option
DerivativesControl measures Forward contracts for foreign debt
Share SwapSwap ratio Controlling parties
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Timeline
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Apr-09 May-09 Jun-09 Jul-09Hire BankersSpeak with regulatorsPropose LOIDue DiligenceClose Merger
Regulators are the deal breaker
Derivative
Controlling measures
• Control is limited to 10% above/below the 6 months export amount
Forward contracts for debt
• R$ 5,114.7M (Saida)à• R$ 4,139 M (Perdigao)• Total debt 13,914 66% is will enter foreign forwards
contracts
Major unpredictable fluctuations in inflation and currency rates are protected
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Regulatory spin off
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• Before: 8956.7 – 35% of revenue• After 7371.7 – 29%• Target Domestic and frozen
Poultry
• 12% of Revenues 1,463• Big in exports
Pork /beef and others
Targeting domestic will satisfy regulators
Ownership Structure
Existing Perdigao shareholders will own 56% of the Merged Company
OwnershipMillion Shares % total
Perdigao SH 207 56.4%Sadia NC 92 24.9%Sadia Common 68 18.7%Total 367 100%
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Conclusion
Thank you
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