OutlookAlthough inflation and interest rates will continue to fluctuate over thecoming years, we believe that positive macro trends will drive sustainedgrowth in Brazil’s food and beverage industry and even more attentionfrom multinational companies and private equity investors.Interest in Brazil is predicated on strong fundamentals and a markettoo large to ignore. In a country famed for income inequality, extremepoverty was cut in half between 2003 and 2008, and Brazil’s C classalone now represents a larger market than the entire population ofGermany, France or the United Kingdom.While effective social programs have received a lot of the credit,substantial increases in real wages and the lowest unemployment inBrazil’s history have been significant factors. Moreover, the expansionof consumer credit has fueled a new class of consumers eager toenjoy what for so long has been out of reach.In the coming years, demographic trends will only accelerate theseconsumers’ aggregate purchasing power. Unlike the United States,where baby boomers are now retiring, or China, where the one-childpolicy has caused the working-age population to shrink, Brazil isentering its prime. The percentage of people between 25 and 50 isexpected to grow 30 percent over the next 10 years.The impact on the food and beverage industry of more consumers,with more money and more credit cannot be overstated.
Domestic Market Overview Outperforming Food Categories - Organic foods - Snacks - Nutritional foods - Diet and light products - Ready-to-drink fruit juices Lifestyle Trends - Increasing demand for chilled frozen and ready-made products - Increasing proportion of meals consumed outside of the home Food Retail -2nd wave of private label introductions, with image adjustment, quality improvement, and price slightly under the brand leader -Emphasis in economic mergers to increase competitiveness
The downstream end of the food industry is comprised of the In 2010, 70% of sales to the domestic market were distributeddomestic and import market distribution industry (including milling through food retailers, and 30% through food service providers.and processing firms which purchase grain and other commodities), As seen by the chart below, food service providers have playedwholesalers and distributors, importers, international distributors, an increasing role in the distribution of industry product (25% ofretail chains, national and international food service segments, domestic sales in 2002 vs. 30% now) as out-of-home dining hassuch as fast food chains, restaurants and hotels. increased in prevalence in Brazil.
Production Brazilian food production: global rankings and share#1: sugarcane, coffee, tropical fruits, orange juice, beef (cattle herd size),alcohol, tropical fruits#2: soybeans (behind the US), poultry (moved up from 3rd place in 2010),candies and confectioneriesImportant producer of pork (4th-largest), corn (4th-largest), cotton (5th-largest), chocolate (5th-largest), tobacco, pulp, milk (6th-largest), seafoodFurther market share gains are expected in the near-term driven byfavorable domestic and global trends
Brazilian Food &Beverage Companies By Revenue By Revenue R$ Millions R$ Millions BRF Brasil Foods BRF Brasil Foods 15,905.8 15,905.8 Bunge Alimentos Bunge Alimentos 15,779.5 15,779.5 Cargill Cargill 13,489.0 13,489.0 JBS-Friboi JBS-Friboi 5,148.8 5,148.8 LDC Brasil LDC Brasil 4,720.3 4,720.3 Amaggi Amaggi 3,963.0 3,963.0A survey published in Exame magazine (2010) on the 500 largest Seara Seara 2,771.9 2,771.9companies in Brazil showed that 40 are food industry companies Marfrig Marfrig 2,624.6 2,624.6and seven are beverage producers. Among the larger companies, Aurora Aurora 2,518.0 2,518.0foreign capital’s share of the food industry stands at 59% (based Minerva Minerva 2,507.2 2,507.2on total sector sales), while foreign capital’s share in the beverageindustry stands at 19%. By Profitability By Profitability EBITDA Margin EBITDA MarginThe sector employs 1,521,000 workers in Brazil and includes (Largest Companies) (Largest Companies)38,128 companies: 81.1% are very small (1-19 workers), 13.5% Garoto 22.5% Garoto 22.5%are small (20-99 workers), 4.0% are of average size (100-499 M. Dias Branco 19.6%workers), 1.4% are big (+500 workers). – Source: Labor Ministry/ M. Dias Branco 19.6% Marfrig 15.2%Rais – 2009 Marfrig Moinhos Anaconda 15.2% 14.8% Moinhos Anaconda Nutron Alimentos 14.8% 14.5%Astor Group’s extensive Brazilian network includes small and large Nutron Alimentos 14.5% Laticinios Jussara 14.4%companies across Brazil. Laticinios Jussara Coniexpress 14.4% 13.3% Coniexpress Yoki 13.3% 13.2% Yoki Foods Kraft 13.2% 11.0% Kraft Foods GDC 11.0% 10.0% GDC 10.0%
Mergers andAcquisitions Food and Beverage Industry M&A (R$ Millions) Food and Beverage Industry M&A (R$ Millions)M&A volume remained strong during 2010 (following a record yearin 2009) as the economy expanded, lending markets loosened andconsumer confidence rose.If commodity price increases taper off and the economy continuesto improve, we will likely see further credit market loosening andheightened deal activity.As developed markets continue to experience incremental growthwe believe that companies will increasingly look toward growthopportunities offered by developing economies such as Brazil. Transaction Buyers Target Target Seller Date Segment 02/03/2011 Coroa Participacoes Usina da Barra S.A. Açúcar e Distillers and Usina da Barra S.A. Ltda Álcool, Non Sugar Food Production Vintners Açúcar e Álcool Lines 07/20/2010 Alothon Group, LLC Casadoce Indústria e Comércio de Soft Drinks Usina Cerradinho - Alimentos Ltda Açúcar e Álcool S/A 06/30/2010 (open market Companhia de Bebidas Das Brewers Soros Fund purchase of shares) Americas (AMBEV) (NYSE:ABV.C) Management LLC 05/14/2010 Citrosuco Paulista SA Citrovita Agro Industrial Ltda. Soft Drinks Votorantim Participacoes S.A. 10/06/2009 Miolo Wine Group Almaden Wine Brand Distillers and Pernod-Ricard SA Vintners (ENXTPA:RI) 08/07/2009 Pepsico, Inc. Amacoco Nordeste Ltda. and Soft Drinks - (NYSE:PEP) Amacoco Sudeste Ltda. 06/01/2009 Santa Clara Indústria Unilever Brasil Ltda., Powder Drinks Soft Drinks Unilever Brasil Ltda. E Comércio De Business Alimentos Ltda.
Issues to Consider in BrazilIncreasing Food and Inflation Exchange Rate Brazilian Beverage TaxesCommodity Prices(global issue)Causes: Demand: increased global Brazil’s inflation-tracking consumer price Rising interest rates (high yields), used Recently enacted 15% federal excisedemand (led by emerging markets: China); index, the ICPA, is currently above 6%, to slow inflation, and rising commodity tax hike (IPI and PIS/COFINS) on non-Supply: short-term shocks (weather), which the highest since November 2008 prices, have attracted foreign investors to alcohol and alcoholic beverages (previousduties (domestic food costs have a 56% weight the market, who have bid up the Real (The tax hike of 15% in January 2009) in the metric), driven by commodity prices Real has advanced 46% since the end ofIn Brazil: food inflation was 10% y-o-y in and credit-driven demand side pressure 2008) Tax hike will likely be passed on to theQ1 2011 (largest culprits: protein, sugar on domestic production consumers – will be offset by 2-3% priceand soft commodities), faced similar issue Brazil has used spot market purchases increasein 2008 Interest rates have been the main tool of US dollars and taxes on inflows (for used by the Central Bank to reel in inflation purchasing bonds / interest-bearing Beverage taxes in Brazil represent 1/3Near-Term Forecast: significant further (SELIC interest rates now at 12.25% vs. accounts, equities) to prevent further Real of the retail price (of that amount, 1/3 isappreciation in commodities pricing is not 9.5% in April 2010), although many believe appreciation federal and 2/3 are the state value-addedexpected, although the global supply of interest rates hikes were enacted too ICMS tax)grains (specifically, corn and soybeans) slowly and too late We expect the end of US quantitativecould remain tight going forward easing in July 2011 should curtail further Government expects inflation to decrease Real appreciation against the dollarImpact: price increases passed on to the in 2H’2011 as the interest rate hikes takeconsumer- could make the consumer effectpull back on discretionary spend (non-essential food and beverages, goods andservices)
Astor Group has a unique combination of merger and acquisition, food & beverage and Brazil experience.Astor Group Expertise in Brazil We maintain ongoing contact with a deep network of companies within the food & beverage sector. This enables us to quickly identify the most desirable partners and reach those companies that are not on the market. Our partners have a successful track record building, growing and selling brands within the food & beverage markets. We recognize why Brazilian food and beverage transactions are different than other types of deals and we prepare our clients so that there are no surprises. When exploring transactions in Brazil, it is critical to have a local partner with deep relationships and cultural understanding. With offices in New York and Rio de Janeiro, Astor Group helps companies from The Carlyle Group to DeVry University better navigate Brazil.
Sample Targets The following companies are illustrative of the types of introductions that Astor Group provides:
Snack foods Location Sao Paulo, SP Total Revenue R$100m Description Produces range of confectionary products from chocolate bars to lollipops. Operates multiple domestic plants and produces products suitable for domestic and international markets. State in the Over R$2 Engages in manufacturing, selling, and Northeast billion distributing of wheat derived products under a variety of brand names. Products include crackers, cookies, pasta, biscuits, vegetable fats and margarines. State of SP R$200m Manufactures and markets bakery products. Specifically, it offers flavored wafers, biscuits, cookies, crackers and other snacks. The company maintains distribution centers in the region. State of SP R$100m Produces, distributes, and sells confectionery products in Brazil and internationally. Its products include chocolates, peanuts, chewy candies, bubble gums, jelly beans,gumdrops, lollypops, stick toffees, mints, and chocolate sprinkles
Fish processor Description Leading national brand of processed fish with high penetration in most domestic supermarket chains High degree of vertical integration: The company owns a fleet of fishing boats and delivery trucks; material portion of revenue comes from the processing of fish caught by their own operations with balance from suppliers all over the world Financials 2010 sales of US$150M with substantial revenue growth over past five years Historical EBITDA is 10% of sales The deal: Owner is looking to sell equity to a strategic partner - ideal partner would have aquaculture experience and international distribution
Supermarket chain Description Top 20 supermarket chain in Brazil with nearly 100 stores spread mostly across middle/low income class neighborhoods of Sao Paulo Serves neighborhoods with high population density and areas of large flow of people; target customer profile comes from income class C, D and E The group has been experiencing a positive impact of rising real wages of the population, encouraging consumption of higher added value products and causing a shortening of the average distance to the supermarkets Financials Closed 2010 with revenues approaching R$1.5 billion (US$900 million), representing an average annual growth of 20% over the last four years The deal: The partners are seeking capital to strengthen its balance sheet and would consider the sale of the enterprise
Diversified sauce, Description Producer of fruit juices, condiments, alcohol beverages, and other juice company sauces Family owned business located in São Paulo State Other key products: Sauces (ketchup, mustard, mayonnaise, hot sauce, tomato sauce, Worcestershire sauce, chocolate sauce), fruit juices, ice cream, professional foodservice line Financials 2010 revenue: approaching US100m The deal: Seeking a minor equity partner
Leading Description Production and distribution of national and international brands of drinks and foods; recognized as one of the most efficient food and manufacturer beverage companies in Latin America, with a diversified portfolio and highly synergistic, broad distribution networkand distributor of Key brand segments distributed: Energy drinks, acai, coconut water, orange juice, vodka, potato chipsglobal beverages Distribution: The company has a national distribution network serving supermarkets, convenience stores, bakeries and bars in all regions of Brazil The Company employs regional sales teams and serves nearly 5,000 supermarkets; through its network of accredited vendors, the company’s products reach more than 200,000 points of sale throughout Brazil Financials Revenues: R$150M (US$100M) The deal: Seeking growth capital
Coconut milk Description The company distributes coconut products all over Brazil and the world, conducting research and employing state of the art technologyand juice company in facilities in the Northeast Runs the largest coconut farm in Brazil and produces coconut derived products (coconuts and coconut water for direct consumption and the husk as an agricultural substrate) from modern factory facilities The company’s factory, storefront and headquarters and management team are also based in the Northeast Financials Revenue: over R$100M (US$70M); EBITDA: above industry average The deal: Seeking equity investment
Coffee producer Description Based in Rio de Janeiro, the Company operates in the coffee market in two segments: green coffee, and roasted & ground coffee, where it and exporter is considered the 2nd roaster in Rio, and one of the biggest in Brazil The Company has a full compliment of facilities for the green coffee process and is known for excellence in quality by the main foreign roasters in the world Exports The Company exports to some of the world’s leading food and beverage companies around the world, in Germany, Italy, the US and Japan The deal: Seeking growth capital
Preserved food Description Based in the state of Rio Grande do Sul, the company engages in the production and sale of preserved food products including meat, products vegetables, fruits, sauces, pickles, tomato products, mayonnaise and fruit preserves Meat products: Meatballs, beef, sausage, beef cold cuts. Vegetable products: Olives, corn cream, peas, pea and green corn, beans, chick peas, cucumbers, sweet cucumbers, homemade cucumbers, and vegetable salads Tomato products: Tomato sauce, Bolognese sauce, tomato pulp, and gravy of chicken; Condiments: Ketchup, standard mustard, hot mustard, spice with pepper, spice without pepper, and spice for poultry; and mayonnaise products. Exports: The company exports to 47 countries Financials Revenue of R$250M (US$150M), EBITDA of R$20M (US$12M) The deal: Seeking growth capital
Rio de Janeiro New York Avenida Ataulfo de Paiva, 5 East 57th Street, 255/302 ∙ Leblon, 16th Floor ∙ New York, Rio de Janeiro 22440-032 New York 10022 Telephone: +55 21.3592.6955 Telephone: +1 212.633.1399www.theastorgroup.com