A meat behemoth to be created in Brazil

Author

Gustavo Ribeiro
May 31, 2019 • Reading Time: 7 minutes

A meat behemoth to be created in Brazil

Meat companies BRF and Marfrig are keen to merge their operations, creating a giant in the meat sector with diversified production and annual revenue of roughly BRL 80bn. The two firms reached a deal for exclusive negotiations with each other for the next 90 days—extendable for an extra 30. The terms of the deal would give BRF 85% of shares of the new company, while Marfrig shareholders would control 15% of equity.

The move was announced after the market closed yesterday, but investors in New York welcomed it—BRF’s American depositary receipts (ADR) rose 6% last night. The new player would be able to sell beef, pork, and poultry on a large scale. The merger also gives BRF a foot in the U.S. market, where Marfrig owns National Beef. According to lawyers familiar with the deal, antitrust authorities should not oppose the merger, as BRF and Marfrig have complementary businesses with little overlapping in their operations.

If the merger prospers, it could change how markets perceive Pedro Parente’s tenure as BRF’s CEO—his term ends on June 17, after which he will serve exclusively as chairman of the board. So far, Mr. Parente had been seen as the leader of a company engulfed by crisis and with little ability to manage its long production chain. Now, he becomes the architect of a deal that could elevate BRF to a status closer to the winning formula of market leader JBS—geographical diversity and “multi-protein” (beef, pork, poultry).

Student protests wane down

Thousands of students, teachers, and researchers protested yesterday against cuts in the federal education budget. By 9:30 pm, demonstrations had been registered in 136 cities in 26 of 27 states. The acts were a continuation of the May 15 protests, after the government froze BRL 5.8bn of its budget for federal schools and universities and suspended fellowships for masters’ and Ph.D. students.

Overall, the protests drew smaller crowds than two weeks ago—but they were still sizeable in big urban centers such as São Paulo and Rio. Political scientist Marco Antonio Teixeira told Nexo that the opposition could find a discourse against the Bolsonaro administration, but only if it keeps people on the streets. The fact that yesterday’s crowds were smaller than Sunday’s protests in favor of the president could be seen as a sign of strength by the government.

Meanwhile, the Education Ministry decided to “declare war” on protesters—releasing a statement “forbidding” parents, civil servants, students, and even their parents from publishing photos of the demonstrations. The move, called “unconstitutional” by a deputy prosecutor general, could reignite a movement seemingly on the way down.

Brazil’s low GDP proof of country’s invest-o-phobia

Brazil’s Q1 2019 GDP figures came negative: -0.2%. While in line with expectations, it was a blow to the Bolsonaro administration, which will increasingly feel more pressure to deliver economic growth in the coming quarters. After the numbers were released, Economy Minister Paulo Guedes talked about allowing workers to withdraw money from a severance fund (FGTS) and social security contributions (PIS/Pasep), in order to inject about BRL 20bn into the economy.

This could bring some short-term relief, but it would be a case of papering over the cracks in the Brazilian economy—also, it will have a smaller effect than when Michel Temer pulled the same move in 2016. Investments in infrastructure, housing, and machinery have dropped for the 2nd consecutive quarter, and remain 27% below Q1 2014 levels. The construction sector, one of the engines of Brazil’s spectacular growth in the 2000s, is 29% below its pre-crisis levels.

Meanwhile, public investments have been cut to the bone—and private players are still too scared to invest. The industry has never had such a small weight on Brazilian GDP, and still has a huge idle capacity. Despite what the Central Bank has said in the recent past, we could see a new round of cuts in the Selic benchmark interest rate—which is already at an all-time low of 6.5%. But even that won’t be enough to push investments without economic reforms passing in Congress.

Pension reform

The pension reform will continue to be a hard-fought battle for the government. In the House’s Special Committee, members of Congress submitted a grand total of 276 amendment proposals to the bill—which could slash the reform’s savings in half. The sheer amount of amendments (which have all to be voted by the committee) could stall the process even further—and shows that parties are willing to corner the government into catering to their demands. 

Also noteworthy

Anti-VP. Under pressure from the social media environment of Bolsonarism, 16 lawmakers are trying to remove their signatures from a constitutional amendment bill that would prevent the vice president from taking office were the head of state to be impeached. The bill, presented by the Workers’ Party, calls for new elections three months after. These 16 congressmen claim they didn’t read the proposal’s contents. Speaker Rodrigo Maia has so far denied the requests, claiming the bill is already in processing.

Avianca. One week after being suspended from flying by regulators, Avianca cannot take off unless it proves its capacity to meet minimum safety and operational requirements. Unless Avianca starts flying again within 10 days, it will lose its slots (authorizations to fly to and from particular airports) in São Paulo-Guarulhos Airport, Latin America’s largest. Losing them would likely mean the end of the carrier—and even more concentration in the Brazilian airline market.

Plane crash. Today marks the 10th anniversary of the Air France Flight 447 plane crash—one of the deadliest in Brazilian aviation history. The flight between Rio and Paris fell from the sky over the Atlantic Ocean, killing all 228 passengers and crew. Multiple factors—including bad weather, equipment malfunction, and wrong decision-making by pilots—led to the crash.

Right-wing. While President Bolsonaro hesitates to adopt a libertarian economic agenda, São Paulo Governor João Doria has fully embraced it—having structured a wide plan of privatizations and concessions. Mr. Doria plans to replace Mr. Bolsonaro as big business’ favorite in the 2022 presidential race. He has already wrested control of his Social Democracy Party (PSDB), and is committed to pushing the party further to the right so it can serve his presidential aspirations.

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