090103 Pilgrim's Pride Under Bankruptcy Reorganization

In a span of less than two years, Pittsburg-based Pilgrim's Pride rose to become the nation's largest chicken seller only to plunge into bankruptcy reorganization in December.

Market analysts have pegged the company's downfall to a trio of events. They include:

A heavy debt load created when Pilgrim's acquired the former Gold Kist in late 2006;

Record high prices for chicken feed such as corn and soybeans combined with record high prices for fuel in much of 2008;

Continued low selling prices for chicken products because of over production in the industry.

"The past two years have been a wild ride in the commodity markets," said Ann Gilpin, with market analyst firm Morningstar. "Corn prices, for example, hovered around $2 a bushel for many years before creeping up to $3 a bushel and then $4 a bushel in late 2006 and early 2007."

Gilpin said corn prices continued an upward march, reaching $8 a bushel this past summer.

"Corn prices have come down substantially since then, but the price acceleration in the early part of the year is still taking a serious toll on the meat packing industry," Gilpin said in December.

"Another part of the problem lies in the price of meat," she said. "An oversupply in the United States, brought about by high production levels and lower export demand, has kept meat prices low relative to the run-up in feed costs."

Big company, big debt

Pilgrim's position in the industry was aggravated with the large debt load it took on after acquiring Gold Kist for $1.1 billion in December 2007.

Lonnie Bo Pilgrim, senior chairman of the board and then chairman, said at the time of the merger that the event was historic to the companies and the industry.

"This is a momentous day for both companies and for the chicken industry," Pilgrim said in a statement at the time.

"We believe the combination of these two great companies will result in substantial value creation for our respective stockholders, employees, business partners and other constituencies."

Pilgrim's officials said at the time they expected the merger with Gold Kist would result in an annual savings of $50 million through consolidation of production and distribution facilities and other cost savings.

"Pilgrim's Pride believes that the combined company will have a strong financial position and substantial cash flow enabling it to consistently reduce debt and return to historic debt levels," the company said in a prepared statement at the time of the merger.

Common shares of Pilgrim's Pride stock traded at $27.90 a share Dec. 4, 2006, when the company's final merger plans with Gold Kist were announced.

Throughout most of 2007, the company's stock would trade higher than $30 a share.

By May, company shares were still trading higher than $25 a share.

Despite initiatives to cut costs earlier in 2008, including plant closings and staff reductions, the company announced in September it was meeting with lenders to amend payment terms.

It received extensions on payments in October and November. The company filed Chapter 11 Bankruptcy on Dec. 1.

By late 2008, Pilgrim's Pride found itself in a position in which it could not meet credit payments, analysts said.

The company last week received final approval from the bankruptcy court to access up to $450 million in financing arranged by the Bank of Montreal as lead agent.

Pilgrim's officials said they expected those funds, combined with cash flows from ongoing operations, to allow the company to continue operations "on a normalized basis" consistent with its pre-bankruptcy practices.

Then President Clint Rivers said Pilgrim's Pride was hoping to restructure .

"First and foremost, this does not mean we are going out of business," Rivers said.

"In fact, I'd like to emphasize that we expect it will be 'business as usual' as we work through this restructuring process."

After making a round of cutbacks earlier in 2008, Pilgrim's Pride said it intends to operate normally while it develops a reorganization plan , Rivers said. It had no plans to close additional plants or lay off more employees.

"This was not a surprise," Paul Aho, economist at the consulting firm Poultry Perspective, said of Pilgrim's bankruptcy filing. "It was a horrible year for the poultry industry."

While Pilgrim's bankruptcy filing had been expected after it sought repeated extensions from creditors on a debt covenant, there apparently was hope it could be avoided, according to J.P. Morgan analyst Ken Goldman.

"Bankruptcy was anticipated but not a given," Goldman said. "Right or wrong, some investors believed that Chapter 11 could be avoided."

Industry wide woes

By mid-2008 the company and others in the industry such as Tyson Foods and Sanderson Farms cited record high feed cost for corn and other feedstocks combined with over production were resulting in a pinch on the bottom line.

In December, Tyson said its lenders agreed to give the company concessions on its credit agreements.

The chicken industry has been hit hard by high costs for feed grain and fuel, and companies have been unable to raise chicken prices enough to offset those costs, because a slowing economy has had consumers buying less, Tyson said in a December statement. In November, Tyson, the No. 2 U.S. chicken producer after Pilgrim's, said it lost $91 million on chicken in its latest quarter, but posted a small profit because of its beef and pork units.

In a Securities and Exchange Commission filing in December, Tyson said the company and certain of its subsidiaries have agreed to pledge "substantially all their assets" to lenders as collateral. In turn, its lenders have agreed to provide "financial covenant relief," Tyson said.

Morningstar in December was advising investors to stay away from buying stocks of poultry firms. Morningstar's Gilpin said other firms such as Smithfield and Tyson offer investors "extreme uncertainty" along with a chance of bankruptcy.

"The one-two punch of high feed costs and low protein prices have had dire consequences for the meat packers," she said.

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