Brazilian heavyweight meatpackers Marfrig Global Foods and BRF are reportedly discussing a possible tie-up. This would allow the companies to create “a world leader in the protein market with wide geographical and product diversification,” according to separate filings. The potential merger may include the consolidation of assets and shares in a new company, though no structure has yet been defined, the deal notes. Under the new deal, shareholders of BRF would assume 85 percent equity ownership and Marfrig would cover 15 percent. In 2018, the firms’ combined net revenues were estimated at around BRL 76 billion (US$19.4 billion).

The potential merger highlights the uptick in business for Brazilian meat companies, noted as the onset of African swine fever continues to grip Chinese pork markets. Asia’s biggest pork producer and consumer is projected to lose 10 percent of its pork production this year due to the disease, according to the US Department of Agriculture. As a result, prices and trade volumes outside of pork are expected to rise for chicken, beef, seafood and even plant-based alternatives – leading to a surge in revenue for related suppliers.

The surge in business for the Brazilian meat market is a recovery from losses in 2017, when BRF was one of the companies embroiled in a food fraud scandal, causing demand for Brazilian beef to take a battering.

In July 2018, BRF set a target of raising BRL 5 billion (US$1.28 billion) through the sale of assets as part of restructuring efforts. The firm has since sold two of its Argentinian companies, chicken and margarine company Avex and processed meats arm Campo Austral, in addition to its Thai and European subsidiaries, to Tyson Foods in a deal worth around US$340 million. In December 2018, Marfrig secured a deal to buy BRF’s Argentinean subsidiary Quickfood for US$55 million.

Through the new tie-up, BRF and Marfrig highlight beneficial complementarities based in products, services and geographic diversification with relevance in the Brazilian, US, Latin American, Middle Eastern and Asian markets. The new deal could present an opportunity to combine BRF’s fresh poultry business – a global player in chicken exports, and Marfrig’s capacities in beef, which is second to meat processor JBS in global ranking through its acquisition of a majority stake in US-based National Beef Packing Company for US$969 million. The combined market cap of the two firms was BRL 27.8 billion (US$7 billion) at last Thursday’s market close.

Beyond meat products, Marfrig shareholders are expecting to benefit from an expanded business with BRF’s capacities as Brazil’s largest processed-food manufacturer, specializing in a diverse range of products, from multigrain products to frozen pizzas.

“The scenario for 2019 is looking very positive for our business. The coming months could present myriad possibilities for animal protein companies given the abundant grain crop and strong Chinese demand. We will be well positioned to capture these opportunities, always with a realistic perspective of our industry and markets,” concludes Lorival Luz, BRF’s Global COO.

In the first quarter of 2019, BRF posted net operating revenue of BRL 7.3 billion (US$1.9 billion) representing growth of 4.7 percent from the same quarter last year. EBITDA margin, measuring BRF’s operating efficiency, stood at 10.2 percent, expanding by 0.5 percentage point from the close of the prior quarter.

The pending merger may help with BRF’s heavy debt load and struggle to regain an investment-grade credit rating, according to a Reuters analysis. BRF’s current debt is 5.6 times its EBITDA. A combined company with Marfrig will have a 3.1 ratio, a source close to the companies informed the news platform.

“The move is surprising in a moment wher the protein market is a hot topic,” says Werner Roger, a founding partner at asset manager Trigono Capital, in a Bloomberg interview. “There’s some complementarity between the businesses of both companies, but it’s still unclear how much they will gain in synergies and how both cultures and leaderships will combine. I wouldn’t hold my breath.”

The companies have announced they are entering a 90-day negotiation period, extendable by another 30, to further outline terms of a deal prior to the consolidation of assets in the new company.