Lindsay Goldberg Selling Keystone Foods for $1.26 Billion

SAO PAULO (Reuters) – Brazilian processed foods company Marfrig Alimentos SA (MRFG3.SA) said it reached an agreement to buy major U.S. distributor Keystone Foods for $1.26 billion, in a bid to expand as a supplier to some of the world’s largest restaurant chains.

Under terms of the agreement, Sao Paulo-based Marfrig plans to buy 100 percent of Keystone’s shares from Lindsay Goldberg LLC, a U.S. private equity firm. The Brazilian company, which has expanded through acquisitions in the past two years as rivals were put up for sale following the global recession, would issue debt convertible into stock to pay for Keystone’s takeover.

“This acquisition raises Marfrig to an outstanding position as a supplier of the whole international chain of McDonald’s (Corp (MCD.N)), Campbell’s (Campbell Soup Co (CPB.N)), Subway, ConAgra (Foods Inc (CAG.N)), Yum Brands (Inc (YUM.N)) and Chipotle (Mexican Grill Inc (CMG.N)),” Marfrig said in a regulatory note late on Monday.

The takeover comes as Marfrig struggles to integrate food processor Seara into its business, which focused originally on meatpacking.

Shares of Marfrig have tumbled 16 percent this year, compared with a 6.2 percent drop in the benchmark Bovespa index .BVSP, underscoring investors’ concerns that its recent acquisitions might not bring about the expected strategic advantages for the company.

Shares of Marfrig were down 3.2 percent to 16.30 reais on Tuesday, the biggest intraday tumble since May 25.

“The announced acquisition could raise execution risk at Marfrig, which is already highly leveraged, is going through an integration process with Seara, and is not generating positive cash flows,” wrote Goldman Sachs analysts Gustavo Wigman and Claudio Lensing in a note to clients. Both analysts are recommending investors sell Marfrig stock.

Marfrig is the latest Brazilian food company to expand abroad, tapping growing demand for protein in China and India, the world’s most populous countries. Brazilian companies are also stepping up takeovers in the United States, where company valuations remain low after the deepest economic recession since the 1930s.

Brazil’s JBS SA (JBSS3.SA), the world’s biggest meat processor, bought a 64 percent stake in bankrupt U.S. chicken producer Pilgrim’s Pride Corp (PPC.N) for $800 million last year.

Marfrig said in the filing that adding the resources and management of Keystone would enable it to expand its operations and better meet the opportunities for growth in the global food market.

The takeover is subject to the approval of antitrust agencies, Marfrig said, adding that it expects to seal the transaction during the second half of 2010.

DEBT ISSUANCE

Keystone, which says it pioneered the development of the boneless chicken nugget, serves more than 28,000 restaurants in 13 countries and last year had revenue of $6.4 billion from its food and distribution business.

“The joining of these two global companies will benefit our clients and employees globally,” Keystone Foods Chief Executive Officer Jerry Dean said in the statement.

Should the deal go through, the Keystone takeover would help double Marfrig’s combined revenue, based on 2009 numbers. The U.S. company had revenue of $6.4 billion last year, while Marfrig posted revenue of $6.1 billion, including Seara.

To fund the purchase, Marfrig plans to sell 2.5 billion reais ($1.4 billion) of five-year real-denominated notes convertible into shares. The notes would be sold privately, meaning that only a small group of investors, preferably shareholders, would be allowed to bid for the securities, the company said.

Selling convertible debt, or securities that are converted into new stock after a certain period, would arrest concerns that the company is taking on so much debt to expand, said RBS corporate debt analyst Bevan Rosenbloom.

“I see this as a credit accretive acquisition, because of the strong participation expected from shareholders,” he said in a phone interview from Greenwich, Connecticut.

The yield on Marfrig’s 9.625 percent bonds due in Nov. 2016 [USG5814RAA61=NASD] fell on Tuesday to 10.30 percent from 10.40 percent the prior session, according to Thomson Reuters prices.

Marfrig’s debt was 4.6 times the size of its capital base as of the end of March. The Goldman Sachs analysts said the company is “already highly leveraged” at this point.

Brazil’s state development bank BNDES [BNDES.UL] is seen as the most likely candidate to buy the Marfrig notes, International Financing Review said on Tuesday, citing market sources with knowledge of the deal. The company’s board will meet on June 30 to approve the debt issuance.

BNDES is seen as the only lender capable of absorbing such an issuance in a private placement, financiers consulted by the publication said. IFR is a Thomson Reuters publication.

By Stuart Grudgings and Guillermo Parra-Bernal
(Additional reporting by Denise Luna in Rio de Janeiro and Marcelo Teixeira and Roberto Samora in Sao Paulo, editing by Gerald E. McCormick)