Brazil: Food andBeverage Market

Although inflation and interest rates will continue to fluctuate over the coming years, we believe that positive macro trends will drive sustained growth in Brazil’s food and beverage industry and even more attention from multinational companies and private equity investors.

Interest in Brazil is predicated on strong fundamentals and a market too large to ignore. In a country famed for income inequality, extreme poverty was cut in half between 2003 and 2008, and Brazil’s C class alone now represents a larger market than the entire population of Germany, France or the United Kingdom.

While effective social programs have received a lot of the credit, substantial increases in real wages and the lowest unemployment in Brazil’s history have been significant factors. Moreover, the expansion of consumer credit has fueled a new class of consumers eager to enjoy what for so long has been out of reach.

In the coming years, demographic trends will only accelerate these consumers’ aggregate purchasing power. Unlike the United States, where baby boomers are now retiring, or China, where the one-child policy has caused the working-age population to shrink, Brazil is entering its prime. The percentage of people between 25 and 50 is expected to grow 30 percent over the next 10 years.

The impact on the food and beverage industry of more consumers, with more money and more credit cannot be overstated.

Outlook

Domestic Market Overview

Outperforming Food Categories

Lifestyle Trends

Food Retail

- Organic foods- Snacks- Nutritional foods- Diet and light products- Ready-to-drink fruit juices

- Increasing demand for chilled frozen and ready-made products- Increasing proportion of meals consumed outside of the home

-2nd wave of private label introductions, with image adjustment, quality improvement, and price slightly under the brand leader-Emphasis in economic mergers to increase competitiveness

Distribution Channels

The downstream end of the food industry is comprised of the domestic and import market distribution industry (including milling and processing firms which purchase grain and other commodities), wholesalers and distributors, importers, international distributors, retail chains, national and international food service segments, such as fast food chains, restaurants and hotels.

In 2010, 70% of sales to the domestic market were distributed through food retailers, and 30% through food service providers. As seen by the chart below, food service providers have played an increasing role in the distribution of industry product (25% of domestic sales in 2002 vs. 30% now) as out-of-home dining has increased in prevalence in Brazil.

ProductionBrazilian food production: global rankings and share

#1: sugarcane, coffee, tropical fruits, orange juice, beef (cattle herd size), alcohol, tropical fruits

#2: soybeans (behind the US), poultry (moved up from 3rd place in 2010), candies and confectioneries

Important producer of pork (4th-largest), corn (4th-largest), cotton (5th-largest), chocolate (5th-largest), tobacco, pulp, milk (6th-largest), seafood

Further market share gains are expected in the near-term driven by favorable domestic and global trends

Brazilian Food & Beverage Companies

A survey published in Exame magazine (2010) on the 500 largest companies in Brazil showed that 40 are food industry companies and seven are beverage producers. Among the larger companies, foreign capital’s share of the food industry stands at 59% (based on total sector sales), while foreign capital’s share in the beverage industry stands at 19%.

The sector employs 1,521,000 workers in Brazil and includes 38,128 companies: 81.1% are very small (1-19 workers), 13.5% are small (20-99 workers), 4.0% are of average size (100-499 workers), 1.4% are big (+500 workers). – Source: Labor Ministry/Rais – 2009

Astor Group’s extensive Brazilian network includes small and large companies across Brazil.

By Revenue R$ Millions

BRF Brasil Foods 15,905.8

Bunge Alimentos 15,779.5

Cargill 13,489.0

JBS-Friboi 5,148.8

LDC Brasil 4,720.3

Amaggi 3,963.0

Seara 2,771.9

Marfrig 2,624.6

Aurora 2,518.0

Minerva 2,507.2

By Profitability (Largest Companies)

EBITDA Margin

Garoto 22.5%

M. Dias Branco 19.6%

Marfrig 15.2%

MoinhosAnaconda 14.8%

Nutron Alimentos 14.5%

Laticinios Jussara 14.4%

Coniexpress 13.3%

Yoki 13.2%

Kraft Foods 11.0%

GDC 10.0%

By Revenue R$ Millions

BRF Brasil Foods 15,905.8

Bunge Alimentos 15,779.5

Cargill 13,489.0

JBS-Friboi 5,148.8

LDC Brasil 4,720.3

Amaggi 3,963.0

Seara 2,771.9

Marfrig 2,624.6

Aurora 2,518.0

Minerva 2,507.2

By Profitability (Largest Companies)

EBITDA Margin

Garoto 22.5%

M. Dias Branco 19.6%

Marfrig 15.2%

Moinhos Anaconda 14.8%

Nutron Alimentos 14.5%

Laticinios Jussara 14.4%

Coniexpress 13.3%

Yoki 13.2%

Kraft Foods 11.0%

GDC 10.0%

Mergers andAcquisitions

M&A volume remained strong during 2010 (following a record year in 2009) as the economy expanded, lending markets loosened and consumer confidence rose.

If commodity price increases taper off and the economy continues to improve, we will likely see further credit market loosening and heightened deal activity.

As developed markets continue to experience incremental growth we believe that companies will increasingly look toward growth opportunities offered by developing economies such as Brazil.

Food and Beverage Industry M&A (R$ Millions)Food and Beverage Industry M&A (R$ Millions)

TransactionDate

Buyers Target Target Segment

Seller

02/03/2011 Coroa Participacoes Ltda

Usina da Barra S.A. Açúcar e Álcool, Non Sugar Food Production Lines

Distillers and Vintners

Usina da Barra S.A. Açúcar e Álcool

07/20/2010 Alothon Group, LLC Casadoce Indústria e Comércio de Alimentos Ltda

Soft Drinks Usina Cerradinho -Açúcar e Álcool S/A

06/30/2010 (open market purchase of shares)

Companhia de Bebidas Das Americas (AMBEV) (NYSE:ABV.C)

Brewers Soros Fund Management LLC

05/14/2010 Citrosuco Paulista SA Citrovita Agro Industrial Ltda. Soft Drinks Votorantim Participacoes S.A.

10/06/2009 Miolo Wine Group Almaden Wine Brand Distillers and Vintners

Pernod-Ricard SA (ENXTPA:RI)

08/07/2009 Pepsico, Inc. (NYSE:PEP)

Amacoco Nordeste Ltda. and Amacoco Sudeste Ltda.

Soft Drinks -

06/01/2009 Santa Clara Indústria E Comércio De Alimentos Ltda.

Unilever Brasil Ltda., Powder Drinks Business

Soft Drinks Unilever Brasil Ltda.

Issues to Consider in Brazil

Increasing Food and Commodity Prices (global issue)Causes: Demand: increased global demand (led by emerging markets: China); Supply: short-term shocks (weather), duties

In Brazil: food inflation was 10% y-o-y in Q1 2011 (largest culprits: protein, sugar and soft commodities), faced similar issue in 2008

Near-Term Forecast: significant further appreciation in commodities pricing is not expected, although the global supply of grains (specifically, corn and soybeans) could remain tight going forward

Impact: price increases passed on to the consumer- could make the consumer pull back on discretionary spend (non-essential food and beverages, goods and services)

Exchange Rate

Rising interest rates (high yields), used to slow inflation, and rising commodity prices, have attracted foreign investors to the market, who have bid up the Real (The Real has advanced 46% since the end of 2008)

Brazil has used spot market purchases of US dollars and taxes on inflows (for purchasing bonds / interest-bearing accounts, equities) to prevent further Real appreciation

We expect the end of US quantitative easing in July 2011 should curtail further Real appreciation against the dollar

Inflation

Brazil’s inflation-tracking consumer price index, the ICPA, is currently above 6%, which the highest since November 2008 (domestic food costs have a 56% weight in the metric), driven by commodity prices and credit-driven demand side pressure on domestic production

Interest rates have been the main tool used by the Central Bank to reel in inflation (SELIC interest rates now at 12.25% vs. 9.5% in April 2010), although many believe interest rates hikes were enacted too slowly and too late

Government expects inflation to decrease in 2H’2011 as the interest rate hikes take effect

Brazilian Beverage Taxes

Recently enacted 15% federal excise tax hike (IPI and PIS/COFINS) on non-alcohol and alcoholic beverages (previous tax hike of 15% in January 2009)

Tax hike will likely be passed on to the consumers – will be offset by 2-3% price increase

Beverage taxes in Brazil represent 1/3 of the retail price (of that amount, 1/3 is federal and 2/3 are the state value-added ICMS tax)

Astor Group Expertise in BrazilAstor Group has a unique combination of merger and acquisition, food & beverage and Brazil experience.

We maintain ongoing contact with a deep network of companies within the food & beverage sector. This enables us to quickly identify the most desirable partners and reach those companies that are not on the market.

Our partners have a successful track record building, growing and selling brands within the food & beverage markets.

We recognize why Brazilian food and beverage transactions are different than other types of deals and we prepare our clients so that there are no surprises.

When exploring transactions in Brazil, it is critical to have a local partner with deep relationships and cultural understanding. With offices in New York and Rio de Janeiro, Astor Group helps companies from The Carlyle Group to DeVry University better navigate Brazil.

Sample Targets The following companies are illustrative of the types of introductions that Astor Group provides:

Snack foods Location Total Revenue Description

Sao Paulo, SP R$100m Produces range of confectionary products from chocolate bars to lollipops. Operates multipledomestic plants and produces products suitable for domestic and international markets.

State in theNortheast

Over R$2 billion

Engages in manufacturing, selling, anddistributing of wheat derived products under a variety of brand names. Products includecrackers, cookies, pasta, biscuits, vegetable fats and margarines.

State of SP R$200m Manufactures and markets bakery products. Specifically, it offers flavored wafers, biscuits, cookies, crackers and other snacks. The company maintains distribution centers in the region.

State of SP R$100m Produces, distributes, and sells confectioneryproducts in Brazil and internationally. Its productsinclude chocolates, peanuts, chewy candies, bubble gums, jelly beans,gumdrops, lollypops, stick toffees, mints, and chocolate sprinkles

Description

Leading national brand of processed fish with high penetration in most domestic supermarket chains

High degree of vertical integration: The company owns a fleet of fishing boats and delivery trucks; material portion of revenue comes from the processing of fish caught by their own operations with balance from suppliers all over the world

Financials

2010 sales of US$150M with substantial revenue growth over past five years

Historical EBITDA is 10% of sales

The deal:

Owner is looking to sell equity to a strategic partner - ideal partner would have aquaculture experience and international distribution

Fish processor

Supermarket chain Description

Top 20 supermarket chain in Brazil with nearly 100 stores spread mostly across middle/low income class neighborhoods of Sao Paulo

Serves neighborhoods with high population density and areas of large flow of people; target customer profile comes from income class C, D and E

The group has been experiencing a positive impact of rising real wages of the population, encouraging consumption of higher addedvalue products and causing a shortening of the average distance tothe supermarkets

Financials

Closed 2010 with revenues approaching R$1.5 billion (US$900 million), representing an average annual growth of 20% over the lastfour years

The deal:

The partners are seeking capital to strengthen its balance sheet and would consider the sale of the enterprise

Diversified sauce, juice company

Description

Producer of fruit juices, condiments, alcohol beverages, and other sauces

Family owned business located in São Paulo State

Other key products: Sauces (ketchup, mustard, mayonnaise, hot sauce, tomato sauce, Worcestershire sauce, chocolate sauce), fruit juices, ice cream, professional foodservice line

Financials

2010 revenue: approaching US100m

The deal:

Seeking a minor equity partner

Leading manufacturer

and distributor of global beverages

Description

Production and distribution of national and international brands of drinks and foods; recognized as one of the most efficient food and beverage companies in Latin America, with a diversified portfolio and highly synergistic, broad distribution network

Key brand segments distributed: Energy drinks, acai, coconut water, orange juice, vodka, potato chips

Distribution: The company has a national distribution network serving supermarkets, convenience stores, bakeries and bars in all regions of Brazil

The Company employs regional sales teams and serves nearly 5,000 supermarkets; through its network of accredited vendors, the company’s products reach more than 200,000 points of sale throughout Brazil

Financials

Revenues: R$150M (US$100M)

The deal:

Seeking growth capital

Coconut milk and juice company

Description

The company distributes coconut products all over Brazil and the world, conducting research and employing state of the art technology in facilities in the Northeast

Runs the largest coconut farm in Brazil and produces coconut derived products (coconuts and coconut water for direct consumption and the husk as an agricultural substrate) from modern factory facilities

The company’s factory, storefront and headquarters and management team are also based in the Northeast

Financials

Revenue: over R$100M (US$70M); EBITDA: above industry average

The deal:

Seeking equity investment

Coffee producer and exporter

Description

Based in Rio de Janeiro, the Company operates in the coffee market in two segments: green coffee, and roasted & ground coffee, where it is considered the 2nd roaster in Rio, and one of the biggest in Brazil

The Company has a full compliment of facilities for the green coffee process and is known for excellence in quality by the main foreign roasters in the world

ExportsThe Company exports to some of the world’s leading food and beverage companies around the world, in Germany, Italy, the US and Japan

The deal:

Seeking growth capital

Preserved food products

Description

Based in the state of Rio Grande do Sul, the company engages in the production and sale of preserved food products including meat, vegetables, fruits, sauces, pickles, tomato products, mayonnaise and fruit preserves

Meat products: Meatballs, beef, sausage, beef cold cuts.

Vegetable products:Olives, corn cream, peas, pea and green corn, beans, chick peas, cucumbers, sweet cucumbers, homemade cucumbers, and vegetable salads

Tomato products:Tomato sauce, Bolognese sauce, tomato pulp, and gravy of chicken;

Condiments:Ketchup, standard mustard, hot mustard, spice with pepper, spice without pepper, and spice for poultry; and mayonnaise products.

Exports:The company exports to 47 countries

Financials

Revenue of R$250M (US$150M), EBITDA of R$20M (US$12M)

The deal:

Seeking growth capital

Avenida Ataulfo de Paiva, 255/302 ∙ Leblon, Rio de Janeiro 22440-032

Telephone: +55 21.3592.6955

5 East 57th Street, 16th Floor ∙ New York, New York 10022

Telephone: +1 212.633.1399

www.theastorgroup.com

Rio de Janeiro New York