JBS: The Story Behind The World’s Biggest Meat Producer
The story goes that when Wesley Mendonça Batista arrived in Greeley, Colo. in 2007 from Brazil he sported the basic cowboy gear of jeans, boots and hat. He spoke no English and made a point of getting blood on his hands– showing butchers at his newly acquired Swift how to carve out the most dollars’ worth of cuts from a cow’s carcass.
Cut to four years later and Batista, 41, was sitting in the lobby of the InterContinental Hotel in New York City looking through a presentation, in English, his dark hair combed back and wearing an expensive suit, a tightly knotted red tie and dress leather shoes. He’s had a BlackBerry at hand with no trace of steer blood on it.
Whatever happened to the cowboy from the Brazilian interior town of Goias? Batista leans forward, shaking his head. “There’s a lot of
Here meaning running family-controlled JBS the world’s largest meat producer ranked 766 in The Global 2000 list of the world’s biggest companies at that time. In the next four years, JBS has participated in 13 transactions, including the acquisition of U.S. grocery-store staples Swift, Smithfield Beef and Pilgrim’s Pride. Few Americans have heard of JBS, yet it was responsible for 22% of the U.S. beef supply. Some 70% of its revenue comes from its U.S. operation. “It was in our DNA to grow,” said Batista.
But that acquisition frenzy, which also extended to Australia and Argentina, larded JBS with $6.9 billion in debt. Some analysts worried JBS was overeating. The firm lost $160 million in 2010 on about $33 billion in sales, mainly because of the cost of integrating Pilgrim’s and Brazilian meatpacker Bertin. Investors got queasy: JBS’ stock, traded in Brazil’s Novo Mercado, dropped by 30% in the last year.
Together with their father, José Batista Sobrinho, who started the business in 1953, the six siblings that controlled JBS shared a $2.6 billion stake in the company (28%). When Sobrinho started the business at his small farm in
Meanwhile, his family also grew: three boys, José, Wesley and Joesley, and three girls, Vanessa, Vivianne and Valere. The boys learned the business alongside their father, although Batista says his father was the only true hands-on butcher in the family; he and his brothers would buy and sell oxen, negotiate with clients and learn the inner workings of the industry. At 17 each dropped out of high school to manage the various slaughterhouses the family owned.
“Our background] was not academic,” said Batista. “We have the background of life, we learned by living.” José, the eldest, led the company through its initial growth spurt, but in 2005, after 20 years at the helm, he decided to explore a career in politics, which ultimately didn’t take off. José remained on JBS’ board, serving as a consigliere to his brothers. At 77 Sobrinho is also an adviser but mostly focuses on the ranch, leaving the day-to-day details to his sons. His daughters are also on the JBS board.
Twenty years ago the brothers wanted to expand regionally. “So they did,”
In 2007 it launched an IPO in Brazil. That’s when its international acquisition spree really took off, with the help of Brazil’s development bank, BNDES, which finances businesses across Brazil’s spectrum (in 2010 its disbursements reached $100 billion). In 2007 it made its first investment in JBS–about $390 million. Today it controls 20.6% of the company.
Swift presented JBS with the perfect opportunity, said Batista: It was the worst-performing company in the U.S. beef market while other companies were performing relatively well. For JBS Swift’s problem was clearly a question of poor management.
It paid $225 million in cash and assumed $1.2 billion of Swift’s debt, bringing JBS 12 plants in the U.S. and Australia and adding 23,000 head of cattle slaughtered per day. Before the contract was signed, Batista, who spoke practically no English at the time, decided that to turn the company around he’d have to move his wife and three young children to Greeley. He spent the 45 days before closing the deal with a translator interviewing 300 Swift employees. He likened the experience to being a soccer team manager: “When you’re a new manager the first thing you have to do is get to know the team.”
While Batista focused on operations as chief executive of JBS USA (the company’s American subsidiary), Joesley stayed in Brazil as JBS’ chief executive, focused on finance. The two remained in frequent contact. “They’re always talking, always debating,” says Callaghan. “They use their skills to complement each other.”
In 2009 JBS took another plunge when it merged with Brazilian meatpacker Bertin S.A. It also diversified into poultry, paying $800 million for a 64% interest of Pilgrim’s Pride. It pulled Pilgrim’s out of bankruptcy in a deal that represented an enterprise value of $2.8 billion.
The two acquisitions, made possible by a $2 billion financing by BNDES, made JBS the world’s largest beef producer and second-largest poultry producer. JBS consolidated Pilgrim’s main offices to Greeley and cut 860 corporate and administrative positions. Don Jackson, who was running Pilgrim’s Pride throughout the reorganization process, says although JBS has been part of the company’s corporate reorganization, it did not interfere in chicken operations. By the end of 2010 Pilgrim’s had managed to reduce its debt from $2.1 billion to $1.3 billion.
Being a diversified global protein producer has allowed JBS to navigate the market in a way few others can. In 2008, for instance, when the European Union restricted Brazilian meat, alleging breeders weren’t complying with EU traceability measures, JBS took advantage of its Australian subsidiary to export to Europe. (Brazilian beef exports to the EU resumed in 2009.) No Brazilian meat producer can export cuts to the U.S. because of U.S. safety rules. JBS has its own U.S. subsidiary. Also, since it produces three different proteins–beef, pork and chicken–it can hedge.
Global expansion has its limits. In 2008, when JBS announced it was buying National Beef Packing, the U.S.’ fourth-largest beef processor, regulators in Washington filed an antitrust lawsuit asserting the acquisition would impose a “fundamental restructuring of the U.S. beef-packing industry” and “eliminate head-to-head competition,” hence bringing up consumer prices.
In 2009 JBS abandoned the deal. Earlier that year, when rumours circulated that JBS was bidding for Sara Lee, analysts questioned how JBS would finance the deal. The bid did not go through. After almost four years in Greeley Batista returned to São Paulo, where he and his family now live. He took on the role of the global chief executive of JBS while Joesley is now chairman.
Jackson became head of JBS USA, responsible for its integration. Although the company is run by brothers, he does not think of it as a family business. “JBS is not run, if you will, for the sheer benefit of the family,” he said. “we were very responsive to the other shareholders and creditors”.
However, allegations of bribes over tainted exports add to a line of other corruption scandals involving the family and their employees.
When Flavio Evers Cassou, an employee of the world’s biggest meatpacker, JBS, dropped off a large cooler of meat at a friend’s home last year in southern Brazil, he could not have foreseen the crisis of confidence it would cause in the industry and the country’s wider corporate sector.
The friend in question happened to be Maria do Rocio Nascimento, the chief inspector of products of animal origin in Paraná. And the meat, delivered together with some cash, was allegedly a bribe for signing off on health certificates for JBS products, according to a court order detailing the deal.
Unbeknown to the pair, federal police officers were secretly filming the drop-off and wiretapping conversations between them and scores of other suspects. Last week, police arrested Mr Cassou, Ms Nascimento and 36 others for allegedly helping lead a scheme in which corrupt health officials blindly issued certificates for exports of meat to Europe and China without inspecting cargos.
The court documents list 21 companies involved in the scheme, including units of JBS’s processed meat company, Seara, and BRF, the world’s biggest poultry exporter. In addition, it is alleged that the officials turned a blind eye while lesser known producers converted putrefied meat into mortadella or illegally ground pig heads into sausages. China, Hong Kong, Japan, the EU, Canada, Egypt and Chile have announced full or partial suspensions of imports of Brazilian meat as a result.
The widening scandal is just the latest in a series of damaging revelations to shake the Brazilian corporate sector, already struggling with the worst recession to hit Latin America`s biggest economy. In 2015, state-owned oil group Petrobras was nearly driven into technical bankruptcy by an ongoing investigation into a bribery and kickback scheme involving politicians, former directors and contractors.
Then it was the turn of the country’s giant construction sector. Odebrecht, Latin America’s biggest developer, signed a plea bargain last year in which it admitted to setting up an international system of bribery payments to win public contracts in 12 countries.
So the revelation of corruption in the food industry, one of the country’s most successful export sectors, is yet another sign that the country needs to do more to improve governance, analysts say. “The cases show very clearly the promiscuous relations between the private sector, public sector employees and the state,” says Arnaldo Francisco Cardoso, professor of foreign commerce at Mackenzie Presbyterian University in São Paulo.
With exports to 160 countries, Brazil’s meat industry accounts for $12.6bn of its
The controversy over the meat scandal is expected to hit BRF hardest because most of its production is in Brazil. Following a decade-long overseas acquisition spree, JBS generates 73 per cent of its revenue from subsidiaries in the US, Australia, Europe and Canada, lessening its exposure to the scandal. JBS and BRF, the largest companies allegedly involved, have vehemently denied the more extravagant allegations, such as that they sold rotten meat or products infected with salmonella bacteria.
JBS has said that none of its executives
The Association of Brazilian Animal Protein, an industry lobby group, argues that the global meat industry is so competitive that the country’s competitors would have seized on any problems. Yet out of 853,000 shipments last year, it says, only 184 were found to have complications and many of these were unrelated to sanitary issues. Even the police have come out defending the industry, saying the probe did not mean that corruption was systematic in the food industry.
“China, for example, is a huge importer of Brazilian beef. We cannot replace such a market overnight.” In one conversation secretly taped by police, two owners at a smaller meatpacker allegedly discuss illegally putting 2,000 kilogrammes of pigs’ heads into sausage mix. “It’s prohibited to use meat from the head in sausage,” acknowledged one. “Yes, but it would be only 2,000 kilos to complete the cargo,” said the other, according to the court order.
The same company, Peccin, was also alleged to have covered up the smell of rotten meat by adding excess amounts of acid, the court order alleges. Peccin has denied wrongdoing. While none of the larger producers
Some analysts believe it is part of a structural change, with the country’s independent prosecutors and federal police becoming more active. This is seen to be taking its toll on private sector companies — and particularly the listed groups, according to Eurasia Group, a political risk consultancy. But it added: “In the medium term, the Brazilian private sector will emerge stronger because of it.” Mr Cassou, the employee of JBS’ Seara, captured the mood in a post on his Facebook page before his arrest.
He noted that “ethics is what you do when the whole world is watching. What you do when no one is looking is what is called
The scandals also
With American depositary receipts listed in New York, the company’s largest shareholders also include two government pension funds, Previ and Petros, with about 22 per cent. The scandal, however, highlighted the alleged closeness of its employees with health inspectors in some regional plants, according to court documents. Roney Nogueira dos Santos, the company’s head of institutional and governmental relations, was wiretapped allegedly trying to cover up the fact that BRF sent a senior Brazilian health inspector, Maria
He was taped debating how to handle an illegal political donation requested by a local politician, who also asked Mr Santos for help placing a grandson into the first division São Paulo Football Club, of which Mr Diniz was a director.
Other officials, such as Seara’s Flavio Evers Cassou, are accused in court documents of having had regular access to health inspection computer systems — or to officials with such access — including usernames and passwords. It was alleged that they used this to approve export certificates for countries, such as China. BRF and JBS
Will JBS Survive a Political Corruption Scandal?
As the world’s largest producer of animal protein, JBS is expected to survive its involvement in one of Brazil’s biggest political scandals not just because of its size, but also because it draws 80% of its income from abroad. In 2016, the company pulled in revenue of $53.5bn. In comparison, its closest rival, Arkansas-based Tyson Foods, made $41.3bn in 2015.
The majority owners of JBS, brothers Joesley and Wesley Batista, are accused of bribing politicians in exchange for rulings and favours that would benefit the business. They are also accused of paying members of congress R$30m ($9.5m) to ensure Eduardo Cunha – who has since been jailed – was elected speaker of the House of Representatives in 2015. The Batistas called the payments “campaign contributions”, claims denied by Cunha who says the money was given directly to each congressman.
Secret contributions to political parties started small, in 2002, amounting to about R$200,000 ($63,514). By 2014, they had ballooned to about R$366m ($116.2m), divided among 24 parties.
The brothers have been under investigation since 2016, with at least five separate cases opened against them during that time. On May 18, 2017, they agreed to tell investigators everything about the scheme – in return for total immunity from prosecution and
Rapid growth and expansion overseas
JBS began life in 1953 as Casa de Carnes Mineira, a small butcher’s shop in Anápolis run by José Batista Sobrinho, father to Joesley and Wesley. That same decade, the planning and building of Brazil’s new federal capital Brasilia gave Sobrinho the chance to expand his business. Envisioned by President Juscelino Kubitschek, Brasilia was born to develop the country’s interior and disperse some of the Brazilian population concentrated along the coastline.
But such development takes time, and for several years Brasilia was nothing more than a collection of construction sites – construction sites that, in 1957, Sobrinho began supplying beef to. But it was not until 1970 that the butcher decided to buy his first slaughterhouse and change the company name to Friboi.
By 1980, Friboi had bought another meat processing plant in the Federal District, tripling the number of cattle slaughtered daily to 300. In 1985, Friboi decided to expand out of the meat business, building a plant to produce soaps. But it didn’t take Sobrinho long to once again hear the call of the cattle, and a small meat-processing plant was purchased in Luziânia in 1988. Eight years later, a fourth plant was purchased in Goiânia that would allow Friboi to meet stringent European meat standards and export its goods further afield.
But it wasn’t until 2005, with the purchase of Argentine meat processor Swift Armour, that Friboi’s international expansion began. Two years later it launched an initial public offering and was listed on the São Paulo Stock Exchange. It also changed its name to JBS, in honour of its founder, and bought Swift units in the US and Australia. This also marked the addition of pork and chicken to its range of products.
In 2009, JBS bought major US poultry-processing company Pilgrim’s Pride, significantly boosting its US payroll to 70,000. In 2015, Primo Smallgoods in Australia and Moy Park in Ireland came under its remit. The Moy Park acquisition helped JBS grow its manufacturing and distribution of prepared foods in Europe, and in 2016 the company’s income rose to R$170bn ($5.4bn), up from R$4bn ($1.3bn) in 2006.
JBS Corruption Timeline, 2005-16
Source: emerge85, 2017
Unfair advantage over other Brazilian companies?
The national development bank Banco Nacional de Desenvolvimento Econômico e Social (BNDES) started a programme of “national champions” during the administration of President Luis Inácio “Lula” da Silva in which it proposed to lend money to and buy shares in selected Brazilian companies it believed could be turned into giants
The programme continued to grow and, in 2011, BNDES loaned $96.3bn to Brazilian companies – more than triple what the World Bank loaned to countries around the world the same year ($28.9bn).
For JBS, rapid expansion fuelled by generous loans and investments courtesy of BNDES raised accusations the company was given “an unfair advantage” by the bank, University of São Paulo Professor of Economics Paulo Feldmann said. “The process of choosing ‘national champions’ was never publicly discussed, not with society or congress. JBS was chosen, but who knows with what criteria.”
BNDES Bank defended
John Wilkinson, a professor of economic sociology at the Federal Rural University of Rio de Janeiro, wrote a report in 2014 for BNDES detailing the role the bank played in the growth and success of JBS.
“Except for the purchase of Swift in Argentina, BNDES did not provide loans but took a share in the company as it does with other firms in Brazil, through its investment arm BNDESPar.”
“Participation was fundamental and in line with the federal government’s industrial policy priorities. BNDES has played a crucial role in supporting strategic industrial development in Brazil and its support is subject to rigorous technical and economic analysis.”
Future of JBS and the Batista family?
Some critics are wary of BNDES helping JBS buy foreign competitors.
“BNDES is a public bank that should be stimulating internal production and not external production. The US is our economic competitor, it is Brazil’s competitor in the export of chicken meat.”
There remains much anger in Brazil at the
For now, the brothers are adjusting to running a smaller and leaner operation, having stepped down from their positions on the board of directors in May 2017. However, Wesley has stayed on as the company’s president.
“The company is already shrinking. They have already sold Vigor (a dairy products company) and have renegotiated their loans with banks,” says Hausknecht. “BNDES is trying to get Wesley out of running the company, but the market likes and trusts him as a businessman and manager. In the end, it seems the market does not really care about the political corruption allegations.”
However, some markets are reacting to the scandals. The EU has banned 35% of Brazilian Chicken exports and others are sure to follow. Brazilian companies are the worlds largest protein exporters so these are stories to follow.
And the moral is? Corruption pays as long as you are bribing the right politician and he can stay in power. Rotten to the core sadly.
Sources: FT Times, Forbes