Bloomberg reports that Perdigão SA, Brazil's largest food company, agreed to take over rival Sadia SA in a share-swap transaction that will form the world’s biggest poultry processor by market value, overtaking Tyson Foods Inc. of the US.

Perdigão will change its name to BRF Brasil Foods SA and incorporate Sadia shares owned by HFF Participacoes SA, a holding company formed by investors who have more than 51 per cent of Sadia's voting stock, Perdigão said today in a statement to Brazil's securities regulator. The new company will also sell 4 billion reais (BRR; $1.94 billion) of shares.

Perdigão pursued a take-over of its smaller rival after Sadia posted the first annual loss in its 65-year history because of wrong-way bets on the Brazilian currency. The combined company would be valued at about $5.3 billion, based on the market value for each on 18 May, compared with $4.97 billion for Springdale, Arkansas-based Tyson Foods.

"The stock had risen a lot before the announcement and was a little stretched," Carlos Camacho, who helps manage $1 billion in assets at GAP Asset Management in Rio de Janeiro, said yesterday in a telephone interview. "Then you have this elephant entering the room which is the share sale."

Perdigão slumped the most since 24 March in Sao Paulo trading yesterday. It fell BRR 2.31, or 6.4 per cent, to BRR 33.99. Sadia fell 23 centavos, or 5.1 per cent, to BRR 4.32, after earlier declining as much as 9.7 per cent.

Sadia Group

Controlling shareholders of Sadia will get about BRR 1.4 billion in shares of the new company, Sadia Chairman, Luiz Fernando Furlan, told Bloomberg yesterday in an interview. The new company may have about BRR 30 billion of sales a year "shortly" and would have a cost advantage over competitors including Tyson, Perdigão Chief Financial Officer, Leopoldo Saboya, said.

Perdigão shareholders will have 68 per cent of the new company and Sadia's 32 per cent. Brazilian pension fund, Previ, which currently owns shares of both, will hold about 12 per cent.

The new company will be co-chaired by Perdigão Chairman, Nildemar Secches, and Sadia's Mr Furlan.

Combining the two companies will generate BRR 2 billion of cost savings in distribution and production, according to Denise Messer, an equity analyst at Brascan Corretora in Rio de Janeiro. The two companies estimate that the potential cost savings could be as much as double that figure.

HFF, whose number of shares will be equal to the number of Sadia voting shares its owners hold, will receive 0.166247 voting share in Brasil Foods for each HFF share. Perdigão will also offer to incorporate all of Sadia's shares, giving 0.132998 voting share per Sadia voting or preferred stock.

Board members

HFF will name three of Brasil Food's 11 board members, including a co-chairman, Perdigão told Bloomberg.

Perdigão overtook Sadia as Brazil's biggest food company in 2007, a year after rejecting a BRR 3.9 billion take-over bid from its competitor. The failed offer prompted Perdigão to buy poultry and dairy producer Eleva Alimentos SA. The company previously bought margarine brands from Rotterdam-based Unilever NV and the meat-processing unit of Cebeco Groep BV.

Perdigão, founded 75 years ago by Italian immigrants to Brazil, sells products including poultry, pizza and lasagna in more than 110 countries and has more than 55,000 employees. The company's brands include the namesake Perdigão, Batavo and Perdix. Sadia, whose name in Portuguese means 'healthy', was founded in 1944 and makes more than 2,500 types of food.

No. 3 in Meat

The combined new company would become the third biggest meat processor in the Americas by sales after Tyson and Brazilian competitor JBS SA, according to Mariana Peringer, an equity analyst at Banco do Brasil SA in Sao Paulo, reports Bloomberg.

Brazil's state development bank, BNDES, is financing the biggest acquisitions in the country as other sources of credit dry up, driving a consolidation in the meat, ethanol, paper and telecom industries and creating 'national champions', according to Marcello Hallake, an M&A lawyer in New York who has spent more than a decade advising in Latin America.

BNDES may buy shares of the new company, bank President, Luciano Coutinho, told reporters yesterday in Rio de Janeiro, without giving more details. Sadia and Perdigão are in preliminary talks with BNDES, Perdigão chairman, Mr Secches, said.

"We are enthusiastic about the new company but would still like to gain more visibility on the structure of the capital increase," Juliana Rozenbaum, an analyst at Itau Securities in Sao Paulo, said yesterday in a note to clients. "For now, the biggest question remains the subscription price."

Struggling with debt

Sadia, struggling with debt after settling wrong-way currency bets, had jumped 60 per cent before yesterday in Sao Paulo trading since 16 March, when it said it was in merger talks with Perdigão. Perdigão rose 19 per cent over the same period, compared with a 33 per cent gain for the benchmark Bovespa index.

Sadia booked more than BRR 3 billion of expenses related to derivatives in the second half of 2008 after Brazil's real slumped 31 per cent. The poultry exporter, based in Concordia, Brazil, had its first annual net loss since it was founded in 1944 last year because of the wrong-way currency bets.

Sadia was the first Brazilian exporter to announce derivatives losses on 25 September last, after it fired Chief Financial Officer, Adriano Lima Ferreira, for allegedly exceeding company limits on currency hedging contracts.

Perdigão's BB+ corporate credit rating, one level below investment grade, may be cut by Standard & Poor's Ratings Services following the merger. Sadia's B grade, five levels below investment quality, may be raised, S&P told Bloomberg.

World's largest poultry company

Financial Times of London comments that the new combined company will export about 42 per cent of its production, and that it will be the world's biggest poultry company by market value, overtaking Tyson Foods of the US.

Further Reading

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You can view the joint statement on the deal from Perdigão and Sadia by clicking here.