Industry News | December 18, 2008
Big Moves in Brazilian Pizza Market
As disclosed in August 2008, Brazil Fast Food, through its wholly owned holding company BFFC do Brasil Participações Ltda, signed an agreement to purchase 60 percent of Internacional Restaurantes do Brasil Ltda (IRB), the Yum! Brands franchisee in São Paulo operating 14 Pizza Hut stores. This transaction included several legal procedures involving the partners that will hold the other 40 percent of IRB. All these procedures are being concluded at the present moment. The acquisition of IRB will transfer to the Brazil Fast Food’s 2008 consolidated financial statements a gain of around R$3.5 million originated in the tax allocations of IRB’s tax loss carry forwards. Brazil Fast Food paid $5.5 million for the acquisition of IRB which was transferred to the sellers at the exchange rate of R$1.57 per dollar.
At the time the purchase agreement was signed, the funding for this transaction was structured with a R$9 million loan from UBS Pactual bank. The loan was granted for a term of three years and with an interest rate of CDI+2.75 percent p.y., a very reasonable rate for the Brazilian last August financial market. The bank also imposed as a condition, that the Company sign a swap contract linking 35 percent of the loan to the R$/US$ exchange rate with a cap of R$1.73 per dollar, and a start date for the exchange rate correction of the debt on December 15, 2008.
“This agreement with UBS Pactual does not interfere with the normal course of our business,” says Ricardo Bomeny, CEO of BFFC, “Our sales are growing at a rate of 9 to 10 percent over last year’s levels. Nevertheless the economic scenario in Brazil for the next year remains uncertain. We expect the recent devaluation of the real to impact our cost of sales and we cannot as yet predict the reaction of consumers to the restriction of credit and to an eventual increase in prices. For the moment, however, our restaurant chains are posting excellent performance despite the economic slowdown observed in other areas of the Brazilian economy.”
The global financial crisis that broke out last September has significantly affected the R$/US$ exchange rate, which has been going through volatile oscillations of up to 70 percent from the previous value. As a result the company will incur an exchange loss the fiscal year of 2008, as disclosed in the 10-Q filed on November 25 2008, corresponding to the difference between the rate of R$ 1.57 and the market rate in December 12, 2008. This corresponds to a loss of R$ 4.3 million that will impact negatively the 2008 consolidated income.
The company found it was prudent to negotiate a swap targeting a reduction and a limitation of losses and finally arrived to an agreement with UBS Pactual. The loss deriving from the swap will impact negatively 2008 income by an additional R$2.1 million. The total impact of this transaction on 2008’s income will be: a loss of R$6.4 million (the R$2.1 million plus the exchange loss of R$4,3 million) which will be partially offset by a gain of R$3.5 million due to the tax allocations associated with IRB’s tax loss carry forwards. The net effect on 2008 income of these extraordinary items is expected to be approximately R$ 2.9 million.
UBS Pactual agreed to re-finance the 35 percent of the previous loan affected by the dollar rate. The bank consolidated the Company’s debt in a R$8.4 million new loan to be paid in 4 years and with a rate of interest of CDI+8 percent p.y. compatible with the interests practiced at this moment in the Brazilian financial market. The impact of the loan’s interests in the next 4 years will be around R$ 3.0 million beginning with R$1.4 million in 2009, followed by a decreasing amount in the following 3 years. This financial arrangement includes an option for the early payment of the whole amount due, if convenient for the company.
Considering the whole amount paid for IRB including financing and exchange rate losses, the acquisition was closed at a multiple of 3 times the August 07/July 08 EBITDA, a very reasonable price if compared to the market value of restaurant businesses.
Bomeny adds: “We have enough cash reserves and liquidity to respond to the current market challenges and for the funding of our projects. We will continue to execute on our plans to expand our existing brands, but we will also take strong short term measures to control expenses and are currently in very deep discussion with suppliers to adapt the transactions to the new reality of the market”.
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