JBS Announces That Its Subsidiary JBS Foods Plans to Conduct a Registered IPO In the U.S.

JBS S.A. (“JBS” or the “Company”), in a further step towards advancing its planned reorganization, announces that its Board of Directors today unanimously approved the filing of a registration statement with the U.S. Securities and Exchange Commission (“SEC”) of its subsidiary JBS Foods International B.V. (which shall be converted into JBS Foods International N.V.) (“JBSFI”) in connection with its plan to conduct an initial public offering (“IPO”) on the New York Stock Exchange (“NYSE”) for its Class A common shares.JBSFI has its official seat and registered office address in The Netherlands and shall house all of the international businesses of JBS plus Seara. JBS S.A. will continue to manage and control the Brazilian beef business and related activities including leather processing.

Wesley Mendonça Batista will be the Chairman, a non-executive director, of JBS Foods International. The Board of Directors of JBSFI will be composed of nine members, the majority of whom will be independent. Gilberto Tomazoni, who has held senior executive positions at JBS for the past four years, will be the CEO, while Russ Colaco will be CFO. The Company believes that this revised structure and proposed IPO reflects its global production platform, product portfolio and broad international customer base.

The Company expects to complete the IPO during the first half of 2017. The timing, number of Class A common shares and price of the proposed offering have not yet been determined.

This notice does not constitute an offer to sell or the solicitation of an offer to buy securities, and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of that jurisdiction.

With regard to this material fact, the management of JBS S.A. will conduct a conference call with analysts and investors tomorrow, December 06, 2016 at 10:00am (BRT) in Portuguese and 12:00pm (BRT) in English

Car rental company Movida can raise up to US$ 300 million with IPO

Car rental company Movida is expected to carry out an initial IPO that could reach between R$ 800 million and R$ 1 billion, according to preliminary estimates from people close to the deal.The funds raised with the transaction, which is still pending approval by the Brazilian Securities and Exchange Commission (CVM), will be pocketed by both JSL logistics company, Movida’s parent company and the company itself.

This is the second IPO request from a vehicle rental company in Brazil this week. Two days ago, Unidas also expressed the interest of opening to the stock market.

In its third quarter financial statements, Movida reported net income of R$ 13.5 million and revenue of R$ 498.7 million. The company also had negative net working capital of R$ 607.5 million – short-term resources lower than the short-term liabilities. According to Movida, this is due to the investment plan made by the company in the opening of new units and in the expansion and renewal of the fleet.

Itaú to buy Citibank Brazil for US$ 220 million 

Itaú has agreed to pay R$ 710 million (approximately US$ 220 million) for the retail operations of Citibank in Brazil. The transaction was announced this morning. Citi primarily serves high-income customers and has 315,000 account holders in the country.
In the acquisition, Itaú acquired loan portfolio, credit cards, deposits, asset management, insurance brokerage and the 71 branches that Citi has today in the main regions of the country. That is R$ 35 billion in deposits and assets under management, 1.1 million credit cards issued and a credit portfolio of R$ 6 billion reais. After the acquisition, Itaú Unibanco will have R$ 1.404 trillion in assets.

The acquisition still needs to receive the approval of the Central Bank and CADE (Administrative Council for Economic Defense)

Citibank joins HSBC in retreating from Brazil. HSBC announced at the end of 2015 that it sold its Brazilian operations to Bradesco. In a deal already approved by anti-trust authorities,  Bradesco acquired HSBC and brought their assets closer to Itaú, largest private-controlled bank in Brazil, by that metric. HSBC was a lot bigger than Citi in Brazil, but today’s acquisition shows Itaú is not willing to let this largest label go.

Itaú has a 5-star rating from Easy Brazil Investing and continues to be a great way to play the Brazilian economic recovery.

Magnesita merger with Austrian RHI creates global giant in the industry

In an operation that creates a global leading company in the refractories market, mainly used in the steel industry, Brazil’s Magnesita, the third largest manufacturer in the world in this sector, merged their businesses to the Austrian giant RHI, based in Vienna. With the merger of assets, it is formed RHI Magnesita, which will have an annual revenue of approximately € 2.7 billion (R $ 9.8 billion).

The new company, which will have dispersed control, in line with the current profile of RHI, will have its shares listed on the London Stock Exchange. The corporate headquarters will be established in the Netherlands and the Austrian company stocks will be de-listed from the Vienna stock exchange.

Brazilian Economy shrinks 0.51% in May, according to the Central Bank

The Brazilian economy has not confirmed the brief improvement in April. The Economic Activity Index Central Bank (IBC-Br) fell 0.51% in May, after growing 0.07% in April (revised), which was the first increase in 15 months. In the year, the decline was a significant 5.79%.

In the 12 months ending in May, the IBC-Br indicates a decrease of 5.43% in the series without adjustment and 5.51% in the adjusted data. Due to the constant indicator review, the IBC-Br measured for 12 months is more stable than the monthly measurement. Compared with May 2015, there was a low of 4.91% in the series without adjustment and 5.32% with adjustment.

The results came worse than expected by the market players. The average of forecasts made by 21 financial institutions suggested a decrease of 0.24% in the month. Estimates ranged from a decrease of 0.9% and increase of 0.1% for the monthly variation.

In the June Inflation Report, the central bank projected a drop of 3.3% in the GDP for 2016, against the previous forecast of a 3.5% decline. Analysts consulted for making the Focus Bulletin also point to a decrease of 3.3% for the Brazilian economy this year.

EWZ: Ibovespa has its best semester since 2009 and US$ drops 18.6% versus the Brazilian Real

Brazilian’s most traded stock ETF in the US, EWZ soared 46.5% in the same 6 months:

EWZ-6-Months

In the beginning of the year, the perspective for the Brazilian market was not good with the country in recession and inflation sky rocketing. However, in the middle of February, the inflection started fueled by a global recover in commodities prices and an improvement in the expectations for the economic policies, which became known as the impeachment rally.

Besides, the downside event of the semester, the Brexit, was followed by an unexpected help which were the speculations that central banks all over the world will stimulate their economies to face market volatility. On Friday, the president of England’s central bank, Mark Carney, said that the growth in the UK will slow down in the next months and additional interest rate cuts and other measures of monetary ease will be necessary.

Sure, Brazil is not out of the woods yet and the new government still has lots to do to recover the economy. However, the better economic climate has started to translate into improvements in the confidence:

Consumer and Industry Confidence in Brazil

Besides the more favorable political environment, what is also helping in this confidence growth is the fact that some economic indicators are improving, albeit still very bad: IBC-Br, Industry and Services.

Brazilian Retail Sales up 0.5% MoM in April

Brazilian retail sales volume in April increased 0.5% MoM but fell 6.7% YoY, both worse than market expectations, according to IBGE (Brazilian Institute for Geography and Statistics). Although in the monthly comparison, most of the sectors have recorded an increase, it was not enough to reverse the downwards trajectory, still visible in the annual comparison of past months. 

Therefore, we continue with a negative bias to the sector’s performance in 2016, we do not know when sales will have the strength to reverse the negative trend, given:

  • The uncertain political scenario, which makes difficult the turnaround on the confidence and economic growth. 
  • Rising unemployment Rate
  • Low and expensive offer of credit

On the other hand, we have signs that the worst may be behind, since the decrease in retail sales in January was 10.3% YoY

Brazilian Steel Industry in Survival mode for the Foreseeable Future

The Brazilian steel industry has seem better days. If we look at the three stocks traded as ADRs in the NYSE, we can see the depth of their agony in the last ten years:

Gerdau (NYSE:GGB):

Gerdau - Brazilian Steel Industry Agony in the last 10 years
Gerdau – Brazilian Steel Industry Agony in the last 10 years

Companhia Siderúrgica Nacional – CSN (NYSE:SID):

SID - Brazilian Steel Industry Agony in the last 10 years
CSN – Brazilian Steel Industry Agony in the last 10 years

Usiminas (OTC:USNZY):

Usiminas - Brazilian Steel Industry Agony in the last 10 years
Usiminas – Brazilian Steel Industry Agony in the last 10 years

In the 27th Brazilian Steel Congress, held by the Brazil Steel Institute, industry executives said that the moment is still of high pressure and explained their survival strategies. As a common theme, they all mentioned exports will be the way to survive in the short term.

Benjamin Steinbruch, shareholder and president of Cia. Siderúrgica Nacional (CSN), said he believes the internal market is “the future” of the sector. It is necessary that the government create mechanisms to ensure that competitive conditions are the same as in other countries. He also complained about the high interest rate in the country today.

Questionable government policies in recent years have led to an impoverishment of the country. “It is the highest impoverishment through which a nation has been, without a war”, he said.

The new president of Usiminas, Sergio Leite, explained that the focus of the moment is survival – in the next three to five years this will be the order of the day. Meanwhile, calls for government priority to a program for the processing industry in the country. “Restructure and adapt businesses to market reality [is needed].” The “bottom” is already approaching, but recovery will take time, he said.

André Gerdau Johannpeter pointed out that the current crisis in the sector was announced. For some time, he said, we have been discussing the pressure that the Chinese excess capacity would have on the Brazilian market. According to the president of Gerdau, this oversupply from China will impact even on the next five to ten years.

“In the short term, what we can do is to seek export. There will be no domestic recovery”, Gerdau said. “Without exports, the picture is dramatic: layoffs and closed plants. In the medium and long term, we need structural competitiveness, changes in labor laws and taxes”, he added.

The event also brought experts on China and foreign trade, which said that the recognition of the Asian country as a market economy by the World Trade Organization (WTO) could distort the steel industry and other sectors in the world.

Usha Haley, professor at the University of West Virginia, said Chinese mills have access to cheap and easy capital, while receiving large subsidies from the local government. She believes that Chinas’s ultimate goal is just to increase production and, while maintaining employment and guaranteed volumes in the domestic market, be able to become a major exporter of the material.

Despite the gigantic fall in stock prices over the last 10 years, it’s hard to get positive on this industry. Sure, after so many years of oversupply and depressing costs, one could expect a turnaround and, in fact, all three ADRs are sharply higher in 2016. However, a more consistent recovery seems to be far for this industry.

CADE Approves Bradesco’s HSBC Brazil Acquisition with Restricticions

Brazilian anti-trust council (CADE) has approved the acquisition of HSBC Brazil by Bradesco with restrictions.

One immediate consequence of the of the restrictions imposed by CADE is that Bradesco is definitely out of the dispute to acquire Citi in brazil, since no new acquisition will be allowed to the bank for 30 months. On top of that, the bank has to lower the portability costs for HSBC customers that do not want to come under Bradesco.

With the acquisition, Bradesco gets closer to the largest private bank in Brazil (Itaú Unibanco). HSBC has around 2 to 3% of the banking system market share and now Bradesco should reach around 17%.

The EPS should have neutral impact for the first year, since the bank does not plan on issuing new stocks to finance the acquisition and the multiples of the acquisition are in line with Bradesco’s itself. The acquiring bank’s expectation is that the transaction starts to generate value a year after its closure.

What to Expect for Brazilian Interest Rate in 2016

Monetary Policy Committee (COPOM) has decided to keep the Brazilian interest rate benchmark in Brazil (SELIC) at 14.25% a year, unanimously. The central bank repeated the note issued with the previous decision, in which it says “we see advances in the inflation fighting but the still elevated cost of living and expectations are out of the target”.

Even with the repeated note, economists started to review their opinions about when the interest rate will go down again. The last meeting was still ran by central bank president Alexandre Tombini. Now, Ilan Goldfajn will be the one responsible  to deal with variables like economic recession and inflation. Inflation, by the way, that was showing signs of reduction but has again showed resilience.

According to newspaper Folha de São Paulo, despite inflation have shown acceleration in May, the interim government of Michel Temer believes that the fall in the US Dollar exchange rate and the credibility of the new economic team opens space for a reduction in the SELIC. The government is working under the assumption of inflation declaration by year end as well as a further drop in the US$. According to the report, Folha’s initial forecast was for a drop in the interest rate in July but now this may be postponed till August.

And that review in expectation was also followed by other investment banks, such as Goldman Sachs and Bradesco. Bradesco now believes the interest rate benchmark will end the year at 12.75% versus 12.25% before.

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