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Joaquín Sánchez

Joaquin Sanchez, CFA
15.aug.17

Signum Perspectives

Vigor Alimentos S.A. Acquisition Offer

LALA S.A.B. de C.V. notified the MSE that it has reached an agreement with J&F Investimentos and JBS S.A. to acquire Vigor Alimentos S.A. that includes a 50% stake in Itambé Alimentos S.A. Lala offered US$1.800 bn, the equivalent of R$5.700 bn.

The acquisition is pending approval by Grupo Lala’s Board of Directors and General Shareholders Meeting as well as government authorizations and other agreements.

The acquisition plan was presented to LALA’s Board on August 3rd. A conference call was held the following day to clarify the acquisition details, including the means of funding, what impact the ac-quisition will have on key profitability metrics, and how long the absorption costs will last.

We think the acquisition makes sense from a strategic standpoint, as Vigor is a leading company in the South American dairy products market due to its focus on innovating and developing value-add-ed products. Its Brazilian distribution network is one of the most extensive in the country, which has given it competitive advantages in the dairy market and helped boost the number of clients. The network comprises 11 milk collection centers, 14 production plants and 31 distribution centers. The company has a very varied product portfolio that includes yogurt and cheese among other frequently consumed products.

Vigor is the leading dairy product company in Brazil with a strong presence in the states of Sao Pau-lo, Minas Gerais, and Rio de Janeiro, which should help LALA strengthen its organic growth in the dairy and dairy byproduct segments. Vigor could also be a potential source of synergies and help strengthen LALA’s operating and commercial efficiencies. Both companies share similarities, and while the acquisition took place at a high multiple, it could give LALA operating efficiencies in the future.

LALA is continuing with the aggressive expansion strategy it began under a year ago with LALA US. The road has not been an easy one: there are still integration costs to be met, and adapting to the US market is not without its difficulties. Therefore, we believe Brazilian acquisition will be a complicated process.

LALA considered an implied value of R$5.725 bn for 100% of Vigor’s stock. The valuation was based on 2017 Sales and EBITDA estimates of R$5.024 billion and R$329 million, respectively. This resulted in EV/Sales and EV/EBITDA multiples of 1.1x and 17.4x.

We expect LALA to trade at 2017 EV/Sales and EV/EBITDA multiples of 1.25x and 9.96x, respective-ly. Based on the foregoing, we conclude that LALA acquired Vigor at a more expensive multiple. However, besides that multiple, Vigor’s financial position and the potential advantages of the acquisition for LALA should also be taken into account.

Based on LALA’s 2017 sales and EBITDA, Vigor could represent around 48% of LALA’s 2017 sales and 25% of its EBITDA, so it will make a fairly significant contribution to the company. Regarding how the transaction was funded, the company opted for a bridge loan with a combination of long-term debt and additional capital of around US$550 million, US$315 million of which will be contrib-uted by LALA’s current shareholders and US$235 million will be long-term debt. LALA’s debt will increase to US$240 million resulting in net debt of US$116 million.



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