Misconduct in agroholdings. The case of JBS.
16 January 2019
Over the past 20 years, Brazil’s economy has been overshadowed by a number of large corruption scandals that cost it dozens of billions reais and severe reputation losses. Unfortunately, agri-food business has been part of the problem. The present article describes the case of JBS S.A., one of the largest meat manufacturers in the world.
JBS's rise to prominence
JBS S.A. is a Brazilian company producing processed beef, chicken and pork, and is considered to be the largest meat processing company in the world by sales volumes. It is headquartered in São Paulo. The company's name comes from the founder's initials. It was founded by the rancher Jose Batista Sobrinho in Anápolis, Brazil, in 1953. Sobrinho started the business as a small farm. He slaughtered one or two oxen a day, boned the meat and sold it to the local butcher. In 1968, Sobrinho bought a small slaughterhouse, boosting the number of cattle slaughtered to 100 a day. The business began to expand. In the 1980s Sobrinho expanded into owning several slaughterhouses in Brazil. In subsequent years, the company has grown to become the world's largest company in the beef sector controlling all facets of beef production — from feedlots and grazing lands to packing plants to distribution points. J&F Investimentos owned by Joesley Batista and Wesley Batista, the sons of the founder, became a 42 % indirect shareholder in JBS S.A. In 2007, JBS became a publicly held company, and received a large investment from BNDES (Brazilian Development Bank) in the same year. Between 2007 and 2010, JBS received around $2.5 billion in investments from BNDES. Today JBS is a $ 40 billion giant that slaughters 90,000 heads of cattle a day, employs 125,000 workers and exports to 150 countries.
Getting into trouble
In 2007-2010, JBS participated in 13 acquisition transactions and became the owner of Swift, Smithfield Beef, Pilgrim's Pride and Bertin S.A. Swift was the worst-performing company in the U.S. beef market. JBS paid $ 225 million in cash and assumed $ 1.2 billion of Swift's debt, bringing JBS 12 plants in the U.S. and Australia. In 2009, JBS paid $ 800 million for a 64% interest of Pilgrim's Pride and pulled it out of bankruptcy. But those acquisitions, which also extended to Argentina, ended up with $ 6.9 billion of debt. Some analysts worried at that time that JBS was growing too fast and underestimating the costs of acquisitions. In 2010,the firm lost $160 million mainly because of the cost of integrating Pilgrim's Pride and Brazilian meatpacker Bertin. As a result, JBS' stock, traded in Brazil's Novo Mercado, dropped by 30 % that year. In December 2016, JBS announced a re-organization plan, which involved an initial public offering (IPO) in the United States for its international operations, through JBS Foods International. At that time, the company had 150 processing units on five continents.
In March 2017, JBS was suddenly accused by authorities of different illegal actions. Brazil's environmental regulator accused JBS of buying cattle raised on illegally deforested Amazon land while Brazil's police accused it of allegedly bribing food-sanitation inspectors. JBS first denied any wrong doing and then announced that it had penalized the employees responsible for those actions. However, the image of JBS was already damaged. After those accusations JBS' shares dropped 10 %. China and the European Union issued temporary bans on Brazilian meat imports. On March 23, 2017, JBS announced that it had temporarily reduced beef production at 33 of its 36 plants for three days, with a plan to cut production by 35%.
On May 12, 2017, Brazilian authorities announced that they started investigating another issue. JBS was accused of receiving illegal financing advantages from the state-owned BNDES. Based on the findings of the so-called "Operation Bullish", Brazilian police stated that there was a loss of around $ 385 million in public funds as a result of financing of JBS by BNDES. JBS argued that financing was lawful. The company's executives including the CEO, Wesley Batista, and the chairman of the board, Joesley Batista, were examined by federal police. The court forbade the Batistas from restructuring the business during the investigation process. As a result, JBS announced the delaying of its planned IPO due to legal troubles.
On May 17, 2017 the investigation resulted in a new accusation against Joesley Batista. He was accused of allegedly paying bribes to three Brazilian presidents (Michel Temer, Dilma Rousseff and Luiz Inácio Lula da Silva) through J&F Investimentos. Documentation of the paymentswas released by the Supreme Court on May 19. Joesley Batista admitted to paying a total of $ 123 million in bribes to Brazilian politicians over the last 14 years. All three presidents denied accepting bribes and accused Batista of making up evidence in order to make money from the scandal through insider trading. Batista denied this motive. On May 22, the Comissão de Valores Mobiliários (CVM) demanded $ 3.4 billion from J&F Investimentos as a penalty for these illegal actions.
Getting out of trouble
At the end of May 2017, J&F Investimentos agreed to pay US $3.2 billion in fines. After that announcement, JBS's shares rose 9 % on São Paulo’s stock exchange. In exchange for their cooperation, the chairman of the board and his older brother avoided jail time. From that time on, JBS made several changes in its business including the sale of its stake in Vigor Alimentos to Grupo Lala as well as sales of other assets. The company also paid $ 2 billion in debt and prolonged the maturity of its obligations, drastically reducing short-term loans.
On August 26, 2018, it was announced that JBS has recovered from its biggest internal financial crisis and has positioned itself positively in the corporate debt market. In October 2018, JBS invested R$ 45 million ($ 12.1 million) to double production capacity of its two meat processing plants in the state of Minas Gerais. The company aims to benefit from the strong demand for meat in the US and China and seeks to meet this demand by expanding its production facilities.
Lessons learned
Firms striving to achieve economies of size have to be aware also of economies of growth. The latter are mainly associated with Edith Penrose’s managerial limits to growth or, in other words, (temporarily) lacking skills, resources and know how for management of an enlarging enterprise. As the case of JBS demonstrates, today’s complex environment requires that managers of large enterprises possess not only skills that form the ability to integrate acquired businesses or technologies but also facets of moral character that ensure honest and transparent decision making and communication with the society. The absence there of can lead to economic and reputational losses and diminish trust in public institutions.