With Pilgrim's Pride settling a US$1.1bn takeover battle for rival poultry firm Gold Kist, the US meats market is about to change shape. Joe Ayling reports on the implications of the deal.

Several months of fierce negotiation characterised the merger talks between Pilgrim's Pride and Gold Kist, but the deal could now be completed by the end of the year.

The poultry processor finally had its $21.00 per share bid for Gold Kist accepted by both shareholders and board members on Monday (5 December), having started offers in August at $20.00 per share.

The companies say they will now create the world's leading chicken company in terms of production, overtaking Tyson Foods, and the third-largest US meat protein company by revenues. However, Tyson is not expected to make a knee-jerk reaction, such as purchasing another poultry player like Sanderson Farms or Perdue Farms, according to analysts.

By holding out, Gold Kist will now be acquired by Pilgrim's Pride for $1.1bn, plus about $144m of debt, rather than the $1bn originally on the table. Indeed, the final offer represented a 62% premium over Gold Kist's closing stock price before the first offer was made.

The new company will also have a broader geographic reach and customer base, enabling Pilgrim's to compete more efficiently both in the US and internationally.

The consolidation is anticipated to result in $50m of annual cost savings. Synergies will primarily arise from the optimisation of production and distribution facilities and cost savings in purchasing, production, logistics and SG&A (selling, general and administrative expenses).

Analysts agreed that consolidating the businesses would improve efficiencies and lower costs, making the combined company the number one player in the poultry industry. "Given the recent oversupply of poultry and the volatility in chicken prices, greater consolidation should help industry fundamentals,'' Stephens Inc. analyst Farha Aslam said. "The combined company will be the number one player in the poultry industry but will still be subject to industry pricing fundamentals.''

Pilgrim's Pride president and chief executive officer OB Goolsby, Jr says: "We are excited about the opportunity to begin realising the substantial benefits that will result from the combination between Pilgrim's Pride and Gold Kist. The combined company will be well positioned to provide even better service to its customers."

Pilgrim's Pride expects the acquisition, which will result in substantial cash flow, to be accretive to the company's diluted earnings per share after the first full year of operations. The Pittsburg, Texas-based firm said it would use the extra cash to consistently reduce debt and return to historical debt levels.

For the moment though, brokerage Standard & Poor's has kept Pilgrim's on CreditWatch with negative implications, where it has been since August.

Standard & Poor's credit analyst Jayne Ross says: "We will meet with Pilgrim's Pride management in the near term to discuss the company's operating plans, financial policies and strategies, and the transaction's financing. The ratings on Pilgrim's Pride could be lowered (depending on how the transaction is financed) or affirmed, and the ratings on Gold Kist could be raised or affirmed (depending on how the transaction is financed)."

Last month Pilgrim's reported a 2006 fiscal year net loss of $34.2m, or $0.51 per share, on total sales of $5.24bn, including the effect of the one-time tax expenses.

Furthermore, the poultry processor, which has a 16% share of the US poultry market, said at the time that it would reduce weekly chicken processing by 5% year over year from January 2007 to better balance supply and demand amid declining chicken prices and sharply higher costs for corn.

Meanwhile, Gold Kist, which has a 9% market share, also reported a full-year operating loss, of $27.5m, on the back of a 7.7% net sales decline to $2.13bn. The company also oversees the production of approximately 45m pounds of pork each year.

Gold Kist chairman AD Frazier says: "Since becoming a public company more than two years ago, Gold Kist has made significant progress in achieving its business goals. We look forward to working with the Pilgrim's Pride board and management on a smooth integration, and we recommend that all stockholders embrace this transaction by tendering their shares into the premium offer."

The recommended offer follows a series of stand-offs between the two firms over the past months, with Pilgrim's original $20 per share offer labelled as inadequate by Gold Kist, which filed a federal court lawsuit to stop Pilgrim's from proceeding with what it called an unlawful solicitation of Gold Kist stockholders.

Just last Friday (1 December), Pilgrim's called for Gold Kist's board of directors to waive its takeover defences, and its "poison pill", after 67% of Gold Kist's outstanding shares were tendered and not withdrawn. 

However, after this week's enhanced offer both companies are now looking straight through any previous disputes, and towards the benefits of the merger.

Gold Kist president and chief executive officer John Bekkers concludes: "This transaction will position the combined company for long-term growth and leadership in our industry. The collective talents and expertise of our employees and growers, along with our combined customer relationships, will represent a new standard in the chicken business and make Pilgrim's Pride the pre-eminent industry player."