Tough Cut.

Swift Armour's Carlos Oliva Panes is singlehandedly trying to revive Argentina's moribund meat sector.

FOR ARGENTINA, MEAT REPRESENTS more than just food. Along with soccer star Diego Maradona, yerba mate tea and tango, the slab of beef--preferably grilled over an open fire--is one of the country's defining cultural icons.

But paradoxically, while many Argentines still view a good steak as an integral part of their national identity the local meat industry has long been in decline. Argentines eat a lot of beef by international standards, but their annual consumption has dropped by almost half over the past decade to an average of 58 kilos per person. Meanwhile, sanitary problems, government interference and international protectionism have all conspired against exports.

Nevertheless, some producers retain their optimism--not the least Carlos Oliva Funes, president and, since July, majority shareholder in Swift Armour, the country's leading meat processor and packer. "The industry has problems of profitability, without a doubt," he concedes. "But we are completely different from the rest of the industry."

Different or not, a potential success story offers fresh hope for the revival of Argentina's largely moribund meat sector. Oliva Funes' optimism is shared by international investors. U.S. investment companies JP Morgan Capital Corp. and Greenwich Street Capital Partners have each bought a 24.5% stake in the company. Chase Manhattan and BankBoston led a secured loan deal to back Oliva Funes in his purchase of Swift, Argentina's first-ever management buyout.

The banks are charging top dollar for the four-and-a-half-year, US$55 million facility, which comes with a stiff interest rate of Libor-plus 5.5%, which amounted to more than 11% recently. But for Hugo Pezzoni, the local Chase official who worked on the loan, the hefty price tag is no reflection on Swift. "The credit market for Argentina and Argentine companies is very limited," he explains. "The fact that it was possible to do the deal at all shows how good the company is."

The deal was also possible because the repayments will be guaranteed by revenues from export contracts signed with Swift's former owners, Campbell Soup Co. and Vlasic Foods International, ensuring good prices for at least a third of exports. Management buys in. Campbell bought control of the company in 1980 and used Swift as the center for its meat purchases. But as owning the entire chain of production went out of fashion in the 1990s, the U.S. company decided to dump the production of raw materials, first spinning off a large part of its operations, including Swift, into Vlasic Foods, known for its line of pickles.

With Vlasic keen to focus on U.S. retailing, Oliva Funes saw the possibility for a management takeover, following the lead of a U.S. chicken supplier that had worked a similar deal with the company. His experience, more than a quarter of a century in the meat business, helped win over his financial backers. As a former corporate vice president of Campbell and then Vlasic, he also gave the U.S. companies the assurance that their supplies would be in safe hands.

Indeed, Oliva Funes has been either an executive or board member of Swift ever since forming part of a group of local ranchers and meat packers that bought the plant from the government in 1977--the country's first privatization. Government policies at the time hit all exporters, including Swift, and the locals were eventually forced to sell out to Campbell.

"But having already been one of the company's owners, I always had the idea of buying it back," Oliva Funes says.

Under his guidance, the company turned around during the 1980s with the closure of its older facilities and the concentration of operations in a new state-of-the-art plant in the port of Rosario, which finally opened in 1993. Initial investments reached $130 million, with another $50 million spent over the last five years.

"This is the only complete investment that anyone has made in the Latin American meat packing industry in recent years," Oliva Funes boasts. He adds that the spending has come from cash flow and short-term loans from Campbell, which have since been repaid. "This company today has zero debt," he claims.

Beyond the high-tech investments, Swift's secret has been a range of integrated product lines with high margins. It is the leading exporter of processed beef, with exports accounting for three-fifths of its $200 million-a-year turnover. It also leads sales of branded meat products locally.

Sales of fresh unprocessed meat, on the other hand, are far less significant. With international volumes and prices hit by Europe's mad cow disease, these account for only a quarter of company exports. In Argentina, the high rate of tax evasion by smaller operators has made it impossible for larger, tax-paying operators to compete in this low-margin segment.

Beef industry roundup. Nevertheless, Swift diversified its operations in 1986 with the purchase of a cold store close to Buenos Aires, which has served as the base for a high-margin meat storage and distribution business. It also plans to open a new high-tech plant capable of freezing individual cuts by year-end.

Undeterred by the problems of his competitors, Oliva Funes is now studying other investments with JP Morgan and Greenwich. "The idea is to use Swift as a base and try to consolidate the Argentine industry," he explains. "We believe that is a very good possibility in the coming years."

That view is shared by Alejandro Elsztain, general manager of Cresud, the leading Argentine agricultural fund backed by billionaire investor George Soros. But Elsztain believes companies like Swift are just part of his picture. "We also need international players to demonstrate the efficiencies of the principal world operators," he explains. Still, if Swift can show that there is still hope for Argentina's ailing meat industry, foreigners may yet sit up and take notice.