The long-rumored association between Brazil's two leading poultry and pork producers was announced on May 19, with Perdigão and Sadia signing an agreement to create a new company called Brasil Foods S.A. The company will be located in Itajai, Santa Catarina state, where Perdigão is currently based.

Perdigão is buying Sadia on a stock swap deal. Brasil Foods S.A. will be the largest processed food company in Brazil and will be by far the largest poultry and pork processor and exporter in Latin America. The two companies combined process over 1.7 billion chickens and 36 million turkeys a year.

 

Together, the companies control 88% of Brazil's refrigerated pasta market, 68% of frozen pizza market, 65% of the margarine market and 57% of the processed meats market. Perdigão is also a major player in the dairy industry.

 

Both companies have operations in Europe and are major exporters, but this deal will create a new global food powerhouse with combined annual revenue of close US$11 billion, an 119,000-person workforce and 42 plants.

 

According to a joint press release: The Association will comprise: (i) the change of the denomination of Perdigão to Brasil Foods (BRF) and the merger of the shares issued by HFF (a holding company for Sadia stock) into BRF, which could then be followed by the merger of HFF into BRF; (ii) the corporate restructuring of BRF, Sadia and HFF; and (iii) the merger of the shares issued by Sadia into BRF.

Now that the deal is signed, how the actual merger will be carried out is already a topic of great speculation in the industry and media. These two companies have very different corporate cultures, and they've been very fierce competitors through the years.

Most importantly, both companies suffered heavy losses due to currency devaluations at the end of 2008 and both are heavily laden with debt. Sadia suffered the worst, due to currency speculation, and was in big financial trouble, which is what ultimately led to the merger between the two companies. This debt load may prove to be a big challenge for Brasil Foods.