Minerva’s Strategy for Debt Reduction Following Major Acquisition

Minerva, South America’s largest beef exporter, aims to reduce debt following a 7.5 billion reais acquisition of Marfrig assets. Despite concerns over debt levels and operational efficiency, the company predicts sufficient cash flow generation. Analysts caution about market challenges and suggest awaiting a capital optimization plan before investment decisions.

On Thursday, executives from Minerva, South America’s premier beef exporter, assured stakeholders that the company anticipates generating sufficient cash flow to mitigate its debt following a substantial acquisition. This reassurance comes amid analyst concerns regarding Minerva’s debt levels, particularly after the firm announced a significant deal valued at approximately 7.5 billion reais ($1.33 billion) for select assets belonging to its competitor, Marfrig.

Concerns have also been voiced about management’s effectiveness in operating the newly acquired facilities and whether the company can secure enough free cash flow to accommodate rising debt service costs. Analysts noted potential challenges for Minerva, especially after unforeseen delays regarding regulatory approvals and a less favorable market for cattle in Brazil compared to the conditions at the time of the acquisition announcement in August 2023.

Despite these obstacles, Minerva’s stocks saw a 7.3% increase in early trading, even after reporting a loss of 1.57 billion reais ($277.32 million) in the fourth quarter—the first quarter incorporating operations from the new plants. The company’s net debt stood at 15.6 billion reais at the end of this period, reflecting a 75.9% increase from the prior year as it secured additional borrowing for the acquisition.

Analysts Igor Guedes and Luca Vello from Genial Investimentos highlighted the adverse effect of foreign exchange fluctuations, which contributed nearly 2 billion reais to Minerva’s gross debt during the fourth quarter. They cautioned that this rise in borrowings could lead to technical breaches of debt covenants, limiting Minerva’s ability to issue dividends or new debt and potentially necessitating a capital call. Prior to the fourth-quarter results, XP analyst Lucas Alencar recommended that investors await the company’s capital structure optimization strategy before making investment decisions.

Minerva’s commitment to debt reduction following its significant acquisition of Marfrig’s assets reflects a positive outlook, despite existing concerns about operational efficiency and increasing debt levels. The company must navigate potential short-term challenges, including regulatory delays and market conditions, while assuring investors of its capacity to generate cash flow. The recent stock rally, juxtaposed with reported losses and rising net debt, underscores the importance of effectively executing its capital optimization plan to stabilize investor confidence.

Original Source: www.marketscreener.com