SAO PAULO (Reuters) - Management at Brazilian food processor BRF SA has met with resistance from a minority of its board to talks on a potential merger with Marfrig SA that would create one of the world’s largest meat producers, three people with knowledge of the matter said.
The companies announced on Thursday they were discussing a potential deal that would combine BRF, which is active in pork and poultry and leads the world in chicken exports, and Marfrig, a beef packer second to JBS SA globally.
The sources, who asked for anonymity to discuss confidential deliberations, said that BRF’s 10 directors did not unanimously approve the exclusive talks with Marfrig. They declined to disclose the vote tally.
Dissenters questioned how a tie-up would fit with the strategy of Chairman and Chief Executive Pedro Parente to cut debt, sell assets and restructure operations after a string of losses.
One of the sources said management still got support from a “solid majority” of the board, leaving room for discussion of the kind that is common on a deal of this magnitude. BRF’s board includes Parente, former Agriculture Minister Roberto Rodrigues and Augusto Cruz, former CEO of retailer Pão de Açúcar, among others.
BRF declined to comment on the matter beyond its Thursday securities filing.
Skepticism toward the deal comes as BRF struggles to pull off its own turnaround following three consecutive annual losses, raising concerns that a merger could become a distraction.
The negotiations with Marfrig, scheduled to last 90 days and extendable for 30 more days, will be run by a small group of executives, according to one of the sources.
BRF and Marfrig said they were discussing an all-share deal, which would not increase BRF’s debt and could even improve its ratio of debt to operating profit, according to analysts.
A person familiar with the talks said the companies aimed to create a global meatpacking giant that could go toe-to-toe with larger rivals JBS and Tyson Foods Inc, which both sell poultry, pork and beef.
Shares of BRF fell 5% on Friday as investors and analysts questioned how much cost savings would come from combining two companies in such different segments and geographic markets.
Some people close to BRF also raised concerns about what a Marfrig deal would mean for corporate governance, sources said.
BRF is a corporation with fragmented ownership, but the ownership structure at Marfrig is closer to a family business. Founder and Chairman Marcos Molina controls Marfrig and has a shareholder agreement with Brazilian development bank BNDES, which together have a roughly 70% stake in the company.
Last year, Molina reached an agreement with prosecutors to pay 100 million reais ($26 million) of restitution to state lender Caixa Economica Federal, after being accused of bribing the bank’s employees to secure loans. He did not admit to wrongdoing in the agreement with prosecutors.
After the merger, Marfrig’s controlling shareholders would hold a 5.5% stake in the combined company and BNDES would hold 5%, according to calculations by BTG Pactual analysts. The largest individual shareholders would be two pension funds - Petros, with a 9.8% stake, and Previ, with 9.1%.
One source familiar with the talks said preliminary discussions foresee the company resulting from the merger as a corporation and no shareholder would be given special rights.
Reporting by Carolina Mandl; Editing by Cynthia Osterman