030602 Pilgrim's Pride Plucks Conagra Unit

ConAgra Foods Inc., the U.S.'s second-largest food company, agreed to sell its chicken processing business to Pittsburg, Texas-based Pilgrim's Pride Corp. for about $590 million. The sale marks another significant step in ConAgra's efforts to exit the meatpacking business.

Under the terms of the deal, ConAgra will receive $100 million in cash, $235 million in Pilgrim's Pride common stock and $255 million in subordinated notes, payable by Pilgrim's Pride to ConAgra. Both companies expect the deal to close by the end of the summer.

ConAgra has been slowly eliminating its reliance on unpredictable commodity-driven businesses and focusing on its more profitable branded foods.

"It's about time," said Jeffrey Pittsburg, president of Great Neck, NY, research firm Pittsburg Research. ConAgra, with $27 billion in sales behind No. 1 food company Kraft Foods Inc., produces everything from Butterball turkeys to Peter Pan peanut butter to Crunch 'n Munch popcorn.

"It's consistent with the strategy that we've been talking about to focus on our branded and value-added opportunities," said ConAgra spokesman Chris Kircher. "We're making progress."

Omaha-based ConAgra has been shedding commodity-driven businesses for the past two years. The company let go of its fresh beef and pork business in September for $1.4 billion and sold its Bumble Bee canned seafood business in May for undisclosed terms. ConAgra's chicken processing operations had experienced weak markets and low volumes in the past few years.

Kircher declined to comment on the status of any of ConAgra's remaining commodity-driven businesses and only reaffirmed ConAgra's dedication to focusing on its higher-margin brand operations.

Analysts have a more decisive view. "This is one of their final divestitures," said Pershing LLC analyst Michael Kress. Now that the company is close to realizing its all-brand strategy, he said he expects the company to experience stronger growth. "They're telling us that when this gets completed and they're a branded food company, the growth rates are going to be much higher — so we'll expect much more," Kress said. ConAgra stock reached a 52-week low of $17.75 in March and hit a year high of $27.65 in June 2002. It is currently trading at around $25.

Commodity-driven businesses can be problematic because of unpredictable market fluctuations. "They expose companies to greater market risk, and the returns tend not to be as high in general over time," Kress said.

Pilgrim's Pride, however, is not worried about volatile commodities markets.

"It's a business we know and operate in very well. The challenges we have are the same market challenges we have with volumes, supplies and grain costs," said Pilgrim's Pride chief financial officer Richard Cogdill. "All of those trends are all heading in the right direction. The timing is very good. If we could close tomorrow, we wish we could because we think the summer is going to be heading in the right direction for the chicken industry."

Pilgrim's Pride said the deal will help it to strengthen its own branded business. ConAgra's Pierce, Country Pride, Easy-Entrée and To-Ricos brands, among others, are part of the deal.

Currently, the No. 3 chicken producer in the U.S., Pilgrim's Pride expects to become the No. 2, just behind Tyson Foods Inc. ConAgra's chicken division holds the No. 4 spot in U.S. chicken processing with annual sales of about $890 million. Pilgrim's Pride expects to have annual sales of about $5 billion.

After the deal was announced, shares of Pilgrim's Pride, majority-owned by chairman Lonnie Pilgrim and his family, rose 9% to $9.30 before settling down to trading at around $9.

Cogdill said the two companies had competed for businesses in the past, with Pilgrim's Pride often losing. In 1998, ConAgra won out in a bid for Hester Industries Inc., a manufacturer of poultry products for food service outlets. In 2000, Pilgrim lost again against ConAgra in the competition for Seaboard Corp.'s poultry division. With the ConAgra buy, Pilgrim's Pride gets both businesses, including Hester's old brand, Pierce.

Cogdill said the two companies had been talking for the last nine months. "As we looked and got to know more about them, we tried to encourage them that we weren't interested in anything sizable unless we could get the entire cooking side of the business," Cogdill said, referring to the brands that were part of the deal.

Pilgrim's Pride will take over Con- Agra's major chicken operations in the South and Puerto Rico. The deal includes 16 plants, 15 distribution centers and about 16,000 employees. Pilgrim's Pride said it does not plan layoffs.

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