Sort & Cull

When JBS was first forced to put its sprawling feedlot network on the block early last summer, there was more than a little panic in the air. Given all the scary headlines storming out of Brazil regarding the meat giant's serious involvement in corruption, bribery, and market manipulation, such an extreme decision suggested both desperation and a disregard for collateral damage.

It was like the president woke up one morning and suddenly listed Trump Tower on Twitter. Think Google shocking the internet by unceremoniously posting its algorithms on e-Bay (best offer).

Sometimes this wild Brazilian story of politicians and corporate executives behaving badly played like a soap opera on steroids.

Remember the report of one Batista brother jumping on his private jet to flee government authorities and a long prison sentence?

But besides this crazy context and the apparent urgent need for JBS to raise $1.8 billion in order to pay a massive leniency fine, this enormous divestment seemed chilling by its very size, as well as the significant waves its ripple effect might easily crash through the entire U.S. beef industry (e.g., crippling feeder cattle demand, forcing the closure another processing plant, triggering herd liquidation).

Five Rivers Cattle Feeding was simply the largest cattle feeding operation in the world -- 11 feedlots across Arizona, Colorado, Idaho, Kansas, Oklahoma and Texas -- with a total capacity of more than 900,000 head. In addition, this feeding juggernaut also included a 75,000 head facility in Alberta, Canada, (which was soon sold separately in July).

In short, this was no garage sale.

Finally, the timing of such a feedlot dump was far from ideal. Most contestants in the cattle feeding game were just beginning to clean up from the economic bloodbath of 2016. Such a reality of tattered equity in many corners made it extra difficult for real estate brokers to come up with a short list of potential buyers.

For all these reasons, many believed the Five Rivers deal would have to be broken into several smaller pieces in order for JBS to maximize revenue. There were just not enough deep and willing pockets on the scene willing to bid against each other for a one-package deal.

While I had no clue regarding JBS's true leverage at that moment in time, I was pretty sure piecemealing this vast fed cattle supply system was the very last thing the corporate think tank wanted to do.

Judging by this week's announcement that Pinnacle Asset Management, L.P., a leading commodities and natural resources investment firm, has entered into an agreement to acquire every inch of bunk space JBS can deliver for approximately $200 million, the Brazilian executive gauchos have landed everything they hoped for.

Besides writing a check with a lot of zeroes (though limited details make it tough to tease out, I'm guessing the feedlot infrastructure alone was priced near $200 per head of capacity), Pinnacle also agreed to sign a long-term contract to supply cattle to JBS in North America.

In other words, not only did JBS succeed in liberating a significant amount of capital from the prisons of steel and concrete, the country's largest beef processor managed to preserve its invaluable treasure trove of captive supply.

Win-wins don't get much better.

For more from John see www.feelofthemarket.com

(CZ)

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