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News and analysis on the global poultry
and animal feed industries.
on June 23, 2009

Editor’s comment: Ciphering consolidation

If the industry can bring supply more in line with demand, there should be less economic pressure forcing consolidation.

In a transaction valued at $1.1 billion, Pilgrim’s Pride Corporation is set to acquire Gold Kist, Inc., to become the nation’s, and world’s, largest chicken company. The transaction, which was unanimously approved by the boards of directors of both Pilgrim’s Pride and Gold Kist, will create the world’s leading chicken company in terms of production and the third-largest U.S. meat protein company by revenues.    

The combined company will have a broad geographic reach and customer base, while maintaining a balanced portfolio of fresh chicken and value-added products. In particular, we are told, the enhanced geographic diversification will enable the new Pilgrim’s Pride to compete more efficiently both in the U.S. and internationally.

Against the headwinds of weak chicken prices, climbing corn prices and continued uncertainty over when or where avian influenza might pop up to roil markets in 2007, will other companies pursue mergers or acquisitions?

Already in April 2006, Sylvest Foods filed a petition for relief and reorganization under Chapter 11 bankruptcy and announced plans to sell its assets to Koch Farms. And, in October, Bill Amick announced his company, Amick Farms, had been sold to OSI Group.

So, what’s next in industry consolidation? The answer may depend, in part, on industry profitability in 2007. If the industry can bring supply more in line with demand, there should be less economic pressure forcing consolidation. But even a rosy economic scenario in 2007 does not lessen the possibility of strategic or opportunistic M&A activity.

What might future consolidation achieve? Competitors may feel the need to strengthen geographic reach, customer relationships or product capabilities. One obvious thing missing from the portfolios of even the largest publicly-traded companies is a West Coast presence. Mid-sized players, for their part, might choose to shore up positions regionally or by market segment.

As consolidation progresses, the dynamics of the merger and acquisition activity may subtly change. As the number of potential targets for acquisition shrinks, there could be more competition among potential acquirers for the “right” targets. And, for firms seeking an exiting merger, the ability of management to plan, time and execute an exit strategy would, as always, be crucial.

What’s more, as the number of mid-sized candidates for acquisition dwindles, deals may at some point become one of two things: small and tactical or large and requiring significant liquidity.

Looking back a quarter century, there have been only three broiler industry acquisitions that cracked the 5 percent threshold. That is, only three deals amounted to a net gain of 5 percent or more of total industry production for the acquiring company. A fourth, and biggest in 25 years, is about to occur with Pilgrim’s Pride Corporation set to acquire Gold Kist, Inc. Gold Kist’s ready-to-cook production represented 8.8 percent of total industry volume in WATT PoultryUSA’s January 2006 company rankings.

The next-largest acquisition in industry history was also by Pilgrim’s Pride; in 2003 the Pittsburg, Texas-based company acquired the broiler holdings of ConAgra Poultry. That acquisition represented 6.7 percent of industry production at the time.

Are acquisitions getting larger? We have to look back 17 years to 1989 to find the third-largest acquisition, which represented 6.1 percent of industry production at the time, in which Tyson Foods acquired Holly Farms. Three other Tyson acquisitions in 1998, 1984 and 1986 stand as the fourth, fifth and sixth largest acquisitions based on percentage of industry production. In those deals, which at the time amounted to 5.1 percent, 4.1 percent and 3.5 percent of industry production, Tyson acquired Hudson Foods, Valmac Industries and Lane Poultry, respectively.

So, not only is the industry being changed through consolidation, but consolidation, itself, may be changing. Being able to cipher the implications will be hugely important for individual firms.

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