Corporate scandals are not scarce, but few are so significant that they lead to calls for the president of the home nation to be impeached.
Brazil’s Carne Fraca – or ‘weak flesh’ – scandal of 2017 makes meat producer JBS one of those outliers. By bribing 1,829 officials to enable poor-quality and allegedly spoiled meat to reach consumers, the Sao Paulo-based firm emerged as another participant in a series of Brazilian bribery scandals that saw prosecutors point fingers at three consecutive presidents: Lula da Silva, Dilma Rousseff and Michel Temer.
In May 2017, JBS agreed to pay a record fine of 10.3bn real (£2.4bn) after the brothers who control the business, Wesley and Joesley Batista, confessed to handing 600m real of company funds to more than 1,900 politicians. Then-President of Brazil, Michel Temer, was directly accused of accepting bribes based on evidence provided by the brothers.
In our view, JBS’s conduct provides a prime example of how a lack of effective corporate governance can undermine an otherwise strong business and lead to losses for investors.
Taking a fresh look
Such malpractice is lamentable – not only for ethical reasons, but for financial considerations too – because in its absence, JBS is an appealing company.
JBS employs more than 230,000 people worldwide and has customers in 190 countries. It grew through a series of acquisitions by the Batista brothers and was financed by a public stock offering and funding from Brazilian development bank BNDES. The company today has 51% of its operations in the US, 15% in Asia and 13% in Brazil.
An impressive 24% of JBS’s exports go to Greater China – its largest export region by volume – giving it welcome exposure to the extraordinary growth of meat-eating middle classes in the nation.
JBS is diversified across multiple meat products and has evolved from a purely protein-based company to a provider of value-added products such as antibiotic-free and specialty meats.
Financials: on the right path
JBS came close to a severe liquidity crisis in 2017-2018 amid the bribery scandal, but the firm has since reduced its short-term debts and stabilised its liquidity profile, chiefly by achieving a so-called normalisation agreement with creditor banks in May 2018. This enabled JBS to continue to access credit lines until July 2021, avoiding a debt-repayment crisis and leading to credit-ratings upgrades.
The company is correctly focusing on cash flow generation and deleveraging. It has also completed a series of asset sales to improve its liquidity. JBS also aims to enhance its cost of capital by optimising its capital structure which should be achieved by floating a subsidiary, JBS Foods International, on the US stock market – something the company has aimed to do since late 2016. Plans were stalled by the bribery scandal but are now back on the table.
JBS has also achieved some success in reducing its short-term debt, which stood at 5.5% of short-term debt at the end of the first quarter of 2019 compared with 31% before the 2017 crisis became public.
The first-quarter performance announced by JBS yesterday was mixed but indicates that the business remains healthy. The company’s global reach, diverse lines of business and strong operations have been aided by a positive beef cycle across the industry and a focus on improving efficiency and margins through an improved product mix and innovation.