Engage the Chain Case Study #4: JBS Corporate “Scandals” Led to Delayed IPO & Declining Revenue

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JBS: Corporate Scandals Led to Delayed IPO and Declining Revenue

The Engage the Chain case studies are produced by Ceres and Climate Advisers and written by Julie Nash, PhD, Ceres, and Gabriel Thoumi, CFA, FRM, and Anthony Mansell, Climate Advisers.

Executive Summary

JBS, the world’s largest meat company and beef exporter from Brazil, is embroiled in one of the biggest corporate corruption scandals in global history, Operation Car Wash (an ongoing investigation into Brazilian political and corporate leaders’ alleged corruption).  Once JBS’s reputation was called into question, subsequent revelations showed broader illegal actions by the company and the Batista family who controls the company. Allegations against the company include bribery, fraudulent loans and foreign exchange transactions, violating labor standards, faulty meat inspections and illegal deforestation.

  • Since 2007, after an IPO to raise capital, with the support of BNDES, JBS has pursued an aggressive strategy to become a dominant player in the global meat market by acquiring rivals inside and outside of Brazil, financed mainly by debt. This expansion came without instituting standard corporate governance procedures. The company therefore grew without acting responsibly, or in some instances, legally.
  • In March 2017, Brazil’s environmental protection agency, IBAMA, raided JBS meatpackers in Pará. IBAMA alleged that JBS purchased 50,000 illegal cattle since 2013 raised on protected land violating Brazilian legislation and forest laws. The revenue from this illegal sourcing was not significant to the company’s overall revenue, but the impact of this scandal (in conjunction with other allegations) has led to a decline in valuation of over $2 billion.
  • The combination of these allegations has negatively impacted the company’s performance and altered the firm’s corporate strategy. Declining revenues, regulatory fines, and litigation costs have resulted in a Moody’s downgrade from Ba3 to Ba2 as well as a $2.3 billion decline in JBS’s market capitalization. The company’s initial public offering (IPO) for the company’s foreign operations (representing 85% of sales) has been delayed until at least 2018.

Figure 1: JBS Stock Price


As shown in Figure 2 (below), from farm to table, the production of meat involves an integrated supply chain. The process begins with the raising of animals that will produce meat. Using beef as an example, farmers manage ranching operations and source animal feed. Cattle are sold to feedlots or slaughterhouses. The meat is then packed and processed by companies (including JBS). This section of the supply chain is highly concentrated – for example, in the United States four companies control around three-quarters of the beef processing market (Tyson Foods, JBS USA, Cargill and National Beef).

Once prepared and packaged, the meat (or byproducts including fats and leather) are distributed to food outlets, either restaurants such as McDonalds or retailers such as Costco and Walmart.

The United States, Brazil and China are the world’s largest beef producers, with a combined 43 percent market share of the 63 million metric tons produced each year. While beef production is global, consumption is generally domestic – only around 5 percent of global production is exported. However, in Brazil beef exports are more economically significant, at approximately 20 percent of its production. The USDA projects beef and pork production in Brazil to grow at 3 percent in 2017, mainly due to exports.


Figure 2: JBS and the Beef Supply Chain

Brazil is a major player in the global meat industry. For example, it is the world’s second largest producer of both beef and chicken. However, beef production has had the most environmental impact, as demand for the meat has risen. Half of Brazil’s greenhouse gas emissions come from deforestation, and cattle ranching is responsible for around three-quarters of forest clearing in the Brazilian Amazon. Forest loss since 1970 amounts to 19 percent of Brazil’s total land area.

Left unchecked, continued deforestation in the Brazilian Amazon could increase greenhouse gas emissions at a globally significant level, and also result in loss of biodiversity and other environmental benefits.

Beef production itself can also degrade soil from overgrazing and poor agricultural practices. In addition, the overall greenhouse gas intensity of meat production is greater than that for plant based foods (wheat, rice, etc.). Beef is by far the most greenhouse gas intensive meat to produce in comparison with pork, chicken, fish or animal-based foods such as eggs and dairy.

The impact of meat production on deforestation in Brazil has been under constant public scrutiny l since the 1980s. For example, in 2015, Greenpeace launched a campaign targeting the seven largest supermarket chains in the country, showing that none of them came close to achieving high standards towards reducing deforestation in their supply chains.

In response, the Brazilian government has made efforts to try and arrest the loss of forests. The results have been intermittent. Between 2006-12, the rate of deforestation fell by almost 80 percent – conserving an area of land nearly the size of France. The primary legislation regulating forest use is the 2012 Forest Code, though forest conservation also plays a critical role in Brazil’s national climate change strategy. However, more recently the government has signaled a more pro-development rather than pro-conservation stance. For example, a short term measure by President Temer, MP759, is expected to “substantially intensify deforestation in the Amazon.”

Voluntary commitments, such as the Tropical Rainforest Alliance (TFA) 2020, the “Soft Commodities” Compact, and the New York Declaration on Forests seek to reduce the level of deforestation to produce commodities including meat. Corporate buyers of beef, pork and poultry have made commitments to sourcing zero deforestation products under these initiatives.

Box 1: Allegations against JBS

Deforestation: Illegal Cattle from Suppliers

In March 2017, Brazil’s environmental protection agency, IBAMA, raided JBS meatpackers in Pará. IBAMA alleged that JBS purchased 50,000 illegal cattle since 2013 raised on land violating Brazilian legislation and forest laws. Half of the cattle came directly from embargoed pastures. According to the IBAMA investigations, the remainder were allegedly bought via three-way laundering transactions that disguised the true origin of the animals. The deforested land allegedly linked to JBS is 200 square miles – roughly the size of Manhattan, New York.[1]

Bribery: Brazilian Politicians and Meat Inspectors

In March 2017, Brazilian federal police released results from their two-year investigation of pork, poultry, and beef meatpackers. They served hundreds of court orders and detention warrants against leading meatpacking companies. J&F owners Joesley and Wesley Batista admitted in testimony that they spent about $185 million over several years to bribe nearly 1,900 politicians.

Financial: Inflating Loans to Fund Acquisitions

On May 12, 2017, the Brazilian Federal Audit Court (TCU) released an audit of alleged fraud into BNDES loans used by JBS to finance its 2007 Swift & Company acquisition. The audit revealed BNDES overpaid BLR 0.50 cents per JBS stock, so that BNDES suffered a BLR 69.7 million loss. TCU is probing another BNDES loan to JBS, and BNDES has opened a separate probe into its JBS loans.

Supply Chains: Violating Labor Standards

In June 2017, Brazilian NGO Repórter Brasil and The Guardian exposed that JBS allegedly paid GBP 2 million from 2013 to 2016 for cattle sourced from a farm in the state of Pará where Brazilian prosecutors in June 2016 uncovered men forced to work under inhumane and degrading conditions. 

Financial: Foreign Exchange Transactions

On July 19, the Securities and Exchange Commission of Brazil (CVM) stated it had opened two probes into foreign exchange transactions by J&F Investimentos, alongside 12 other investigations into alleged corporate wrong-doing by J&F controlled companies, including allegations of insider trading. These probes may impact JBS. 


JBS (BN&F BOVESPA: JBSAY) is the world’s largest meat company (including beef, poultry, lamb and pork) by revenues, capacity and production levels. JBS sells its meat products under a range of brands including Swift, Friboi, Seara, Pilgrim’s Pride, Gold Kist Farms, Pierce, 1855, Primo, and Beehive. The company has operations in Brazil and other Latin American countries, the United States, Europe and Australia and employs approximately 200,000 people.

JBS in Brazil sources from around 70,000 cattle suppliers. These suppliers are screened through a social and environmental monitoring system. 40,000 of these suppliers are located in the Amazon Biome region that is governed by the 2012 Brazil’s Forest Code.

Since 2005, the company has undertaken a defensive acquisition strategy. The trigger was a 2005 announcement by BNDES, Brazil’s development bank, that it would lend to Brazilian companies to purchase their foreign competitors to prevent foreign entrants from purchasing Brazilian assets. BNDES has a 21.3 percent stake in JBS through its equity arm, BNDES Participações SA.

JBS acquired sixteen companies from 2007 to 2017 across multiple industries and countries. It accessed BNDES debt facilities to finance some acquisitions. For example, in June 2007 JBS secured a $600 million loan from BNDES, (later increased to $750 million) used towards its purchase of Swift & Company for $1.4 billion. However, the company had also raised funds from capital markets beginning in February 2006 when it issued a five-year $75 million bond with a 9.375 percent coupon.

The result has been an expansion through acquisitions funded through increased debt. Net debt for JBS increased from BRL 2.2 billion in 2007 to BRL 46.9 billion in Q1 2017. While acquisitions have brought in new revenues for the company, its ratio of net debt to EBITDA had increased from 2.6 in 2013 to 4.2 in Q1 2017. This is higher than the average net debt/EBITDA of peers in developed (0.2) and developing (1.7) countries, though similar to Brazilian rivals such as Minerva (3.5).

In 2016, JBS established JBS Foods International (JBSFI), which includes all JBS activities except Brazilian beef and its global leather business. JBSFI’s IPO on the New York Stock Exchange was originally scheduled for the first half of 2017. However, a series of scandals (see Box 1), including accusations of illegal deforestation, led to the IPO being delayed.

These scandals implicated company leadership. On May 26, 2017, Joesley Batista resigned as Chairman of the Board. Meanwhile, Wesley Batista maintained his family’s control of JBS by staying on as CEO. Wesley’s father, José Batista Sobrinho replaced Welsey as vice-chairman of the Board and Wesley maintained his seat as well. Tarek Farahat was named the new JBS Chairman of the Board. On the same day the head of BNDES, Maria Silvia Bastos, also resigned.

On May 31, 2017, Batista family-controlled J&F Investimentos SA, parent organization of FB Participações, agreed to pay $3.16 billion over 25 years as part of a leniency settlement over bribery allegations at JBS.[1]

To ensure financial stability and to pay for their legal settlements, JBS and J&F Investimentos have moved from a strategy of acquisitions to selling operations. As reported by Bloomberg, J&F sold $8 billion in assets over the last three months, with direct involvement from its controllers, the Batista brothers. With the average multiple for Brazil M&A this year at 5.5 times earnings before interest taxes, depreciation and amortization (EBITDA), according to data compiled by Bloomberg, several of J&F Investimentos’ and JBS’ deals have been sold at higher than average prices.  The Eldorado sale closed at 9.3 times EBITDA and, according to JP Morgan, Vigor closed at 17 times EBITDA while Santander places Alpargatas’ valuation at 10.7 times EBITDA.


Alleged illegal deforestation not only damaged the reputation of JBS, but threatened the reputation of business partners, and jeopardized the company’s access to financial markets. The culmination ultimately delayed JBSFI’s IPO and forced an abrupt shift in the company’s expansion strategy.

Reputation. Corruption, illegal deforestation, and fraudulent market activities cause irreparable damage to brand reputation. The reputational damage from alleged illegal deforestation is compounded when the firm has previously represented itself as being committed to sustainable production. In 2009, JBS-Friboi, Bertin, Minerva and Marfrig, representing a 65 percent market share of Brazilian beef exports, committed to a Cattle Agreement for the Amazon. This included strict monitoring and certification to exclude either beef or leather from newly deforested, indigenous or protected lands from their supply chains.

Market. Within the agricultural supply chain, market risk refers to the potential that access to buyers’ markets and financial markets will be adversely affected. In the case of JBS, access to both markets were jeopardized.

  • Buyer’s markets. Unethical business practices led to several clients of JBS suspending contracts. Allegations of labor violations caused Waitrose to suspend sourcing from JBS while it investigated the matter. Then on June 6, 2017, Domino’s Pizza Brazil followed by also announcing that it would suspend purchases from JBS. In addition to labor standard violations (see box 2), the potential spillover to reputation risk remains high for clients, given the firm’s ongoing business with questionable cattle ranches. Allegedly, JBS purchased cattle from a ranch that had previously been fined $36 million for illegally deforesting 33,000 hectares of land.
  • Financial markets. Access to debt and equity markets was jeopardized due to degradation in valuation and debt downgrades. Since reports surfaced of JBS executives admitting to bribery claims in May 2017, JBS stock fell from $6.96 to a low of $3.68 on May 22 (see Figure 1). In that period JBS’ equity valuation declined by $2.3 billion. Similarly, Moody’s downgraded JBS and JBA USA Lux debt, citing concerns about future litigation, governance and liquidity because of JBS’ high financial leverage. They are under review for further downgrades.

In addition to the financial consequences of a damaged reputation and jeopardized access to markets, governments also reacted to the scandals. The company’s former practices of bribery in meat inspections, led to a host of countries imposing restrictions on Brazilian beef imports.

The financial damage due to multiple scandals is evident in the 14% revenue decline year-over-year for the first quarter of 2017. The realization of these risks has been so severe that the company had to shift strategy to meet its ongoing debt and litigation obligations, from defensive acquisition of international rivals to hastily arranged sales and retrenchment.

[1] This leniency agreement was meant to protect minority shareholders, ensure continuation of business and preservation of jobs. J&F stated that it sees the collaboration with Brazilian authorities as a change for the better and reiterated its commitment to work with the Federal Public Prosecutor’s Office in the fight against corruption.

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