The Long and Short
A capital raise and trade war should help Minerva
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Brazil’s Minerva Foods has faced operating challenges in recent quarters, heightened by being the most leveraged name in its sector. But recently announced plans to raise capital should provide some much-needed relief. Minerva moreover may end up as the best positioned meatpacker to disintermediate the China-US trade war. China already represents about 75% of the export volume from the main Latin America markets, and incremental demand may allow Minerva to speed up convergence with the use and pricing levels of assets acquired from Marfrig Global Foods SA. This should help Minerva outperform its Latin peer group in the near term and Brazilian ‘BB’ credit in general.
Last week, Minerva announced a plan to raise up to R$2 billion through a private subscription to current shareholders. The plan involves up to 386.8 million new shares at R$5.17 per share representing an average of the last 60 trading sessions and approximately a 20% discount to the April 7 closing price. The company expects to use proceeds for debt reduction, after the recent Marfrig asset acquisition resulted in Minerva’s balance sheet net leverage increasing to more than 4.0x in an environment of lower beef margins in Latin America. The proposal is subject to approval in the April 29 extraordinary shareholders’ meeting with the main shareholders—Salic International at a 31% stake and VDQ Holdings at 23%— committed to guaranteeing that the minimum subscription of R$1 billion. Additionally, subscribers to the new shares will be granted a ‘subscription bonus’ by Minerva at a ratio of ‘one’ for every ‘two’ shares subscribed. On a full execution, the company can raise R$1 billion of incremental capital, at a strike of R$5.17 per share, over the next three years. The initial R$2 billion will result in an approximate 0.5x reduction in net leverage – from 3.7x to 3.2x, using pro-forma EBITDA from the acquired assets. The potential R$1 billion in warrants would add a further 0.2x reduction. Overall, the capital raise is a clear positive for Minerva’s net leverage, interest cost reduction and free cash flow generation plan and reverses the spread differential to main comparable Marfrig that is benefitting from BRF performance and the eventual turn in core US market pricing.
Recently, Minerva reported solid results for the fourth quarter of 2024, with an EBITDA of R$944 million a little higher than anticipated by the market on strong Argentine results. However overall margin was sequentially lower, reflecting the higher costs in the Latin beef market and the lower margins of the acquired assets, thus far. Minerva continues to face increased operating risks due to the ongoing turnaround of the new operations, in a weaker overall margin environment. The Argentine outpeformance in the quarter was driven by strong volumes and higher prices, while in Brazil, softer-than-expected results were a function of decelerating volumes as capacity utilization trended lower on higher costs. In the newly acquired businesses that the company took over on November 4, capacity utilization (as a group) was significantly lower (with one facility shut down) than the existing Minerva assets and closing the gap there, in addition to directing product to the export market, are the primary strategies to improve operating cash flow in 2025 and 2026. Average prices of output from the new assets were about 20% lower than Minerva’s legacy businesses, mainly due to the lower export exposure. Going forward, ramping up production and seeking new export permits should enable Minerva to improve the overall margin for the consolidated business.
On the balance sheet, the foreign exchange weakness in the quarter hurt results, increasing the company’s net debt in conjunction with the payment for the M&A in the period, thus driving net debt/EBITDA to 3.7x from 3.2x at the end of the third quarter of 2024 – using pro-forma data for the acquired assets. Despite the material cash outlay in the period, the Company retains ample liquidity with cash of more than R$14 billion sufficient to meet amortizations until 2028.
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