Pilgrim’s Pride to Acquire GNP in All-cash Deal

Pilgrim’s looking to keep with a consumer shift toward organic and natural products

p1Pilgrim’s Pride Corp. (NASDAQ: PPC), the second-largest chicken producer in the U.S. after Tyson Foods Inc. (NYSE: TSN), is acquiring smaller rival GNP Company in a $350 million deal that will increase its offerings of organic and antibiotic-free product offerings, as reported by Reuters on November 30th, 2016. The all-cash deal would help Greeley, Colorado-based Pilgrim’s, which is majority-owned by Brazil-based meatpacker JBS S.A., make a smooth transition to keep up with the consumer shift towards products that are more natural and healthy.

GNP has production facilities in Gold Spring and Luverne, Minnesota, and Arcadia, Wisconsin, and provides premium branded and custom chicken products with distribution in nearly all 50 states under the Just Bare and Gold’n Plump brands. GNP has approximately 400 family farm partners and more than 1,700 employees. The GNP plant in Cold Spring alone has 700 employees who process 1 million birds a week. On the other hand, Pilgrim’s Pride produces fresh, frozen, and fully cooked chicken products under the Pilgrim’s and Country Pride brands with distribution primarily through retailers and food service distributors. The company operates chicken processing plants and prepared foods facilities in 12 states, Puerto Rico and Mexico, and employs approximately 38,200 people.

p2The transaction is expected to close in Q1 FY17 and is subject to regulatory review and customary closing conditions. The acquisition of GNP’s Just Bare product lines is seen to be a value-add to Pilgrim’s existing no-antibiotics-ever and organic production capabilities, while strengthening its footprint in higher-margin chicken segments and expanding its presence in the upper U.S. Midwest.

GNP’s innovative technology is deal clincher

p3GNP boasts state-of-the-art assets in geographic areas where Pilgrim’s is not currently present, providing Pilgrim’s the opportunity to expand its production and customer bases, while maintaining high standards for quality service and great-tasting products, according to Pilgrim’s Chief Executive Bill Lovette. Pilgrim’s believes that GNP’s use of innovative technologies such as gas stunning, aeroscalding, and automated deboning, which is meant to reduce the birds’ stress levels before killing, will enhance production efficiencies by increasing the rate of adoption of new technologies in its existing facilities.

The deal is expected to add to Pilgrim’s EPS in 2017 and generate about $20 million a year in synergies. Pilgrim’s expects to capture about $28 million in tax savings and improve cash-flow capabilities following the buyout.

GNP ranks 19 among U.S. producers of broiler chickens, slaughtering 1.9 million birds and processing just under 9 million pounds of chicken weekly, according to Watt PoultryUSA, which tracks companies in the sector, and as reported by Reuters. GNP’s 2015 sales amounted to $443.4 million. On the other hand, Pilgrim’s processes nearly 142 million pounds of chicken a week, making it the second-largest chicken producer in the U.S., according to PoultryUSA. Tyson Foods, based in Springdale, Arkansas, is the largest chicken producer in the U.S., processing more than 175 million pounds a week.

Shift in consumer preferences

Public health experts have long been concerned that routine feeding of certain antibiotics to animals could lead to antibiotic-resistant superbugs, a health hazard for humans. Finding meat raised in the U.S. without antibiotics has become a major challenge for food companies. Tyson, the nation’s largest chicken company, intends to remove antibiotics important to human medicine from its flocks by September 2017. It also has put a stronger focus on selling higher-margin products. To take advantage of the trend, meat companies and restaurants are increasingly seeking to sell poultry raised on organic grain and without antibiotics. The change also addresses consumer concerns about health risks from eating meat raised with certain antibiotics.

Cashing in on this trend, GNP, owned by privately held Maschhoff Family Foods, announced in February 2016 that it planned to remove all antibiotics from chickens sold under its Gold’n Plump brand by 2019. The company already sells organic chicken and chicken raised without antibiotics under its Just Bare brand. Hence, the acquisition of GNP would enable Pilgrim’s to strengthen its position in natural and organic chicken products and ready-to-eat foods.

Pilgrim’s to strengthen presence in organic chicken category

On April 29th, 2016, Pilgrim’s announced that it is in the process of converting one of its plants to process certified organic chicken and estimates the plant will be completely converted some time in 2017. Once up and running, Pilgrim’s estimates that it would account for roughly 20% of the organic chicken production in the U.S. It would also be able to cater to consumer preferences such as organic naturally antibiotic free (NABF). Organic chicken now makes up about 2% of total commercial production in the U.S., but this category is growing at a faster clip of 31% CAGR. Once the plant is fully converted, organic chicken would account for approximately 3% to 4% of the company’s total U.S. production.

Strategic investments to grow major brands

In February 2016, Pilgrim’s unveiled a $190 million strategic capital investment plan designed to enhance growth and expand production of its Pierce Chicken brand. The initiative is part of a focused effort to channel cash back into the business to support sustained margin growth and improve efficiencies. The cash flow reinvestment plan is tailored to meet customer needs through targeted investments in feed production, fresh chicken and prepared foods, including case-ready.

Of the total investment, $18 million would be used for a Pilgrim’s case-ready facility to streamline deboning and packaging processes, and $25 million for the Moorefield prepared foods facility to enhance existing fully cooked chicken lines and add an additional line to meet growth demands for the Pierce Chicken brand. Moreover, $35 million would be used to set up a new feed mill in Nashville, Arkansas, to lower feed costs, enhance feed conversion and improve live poultry performance. Lastly, $20 million would be used at the Mayfield poultry complex to reengineer the facility to improve its value-added product mix in alignment with the needs of a key customer.

Stock Performance

p4Pilgrim’s Pride’s stock ended the day at $17.61, slipping 3.77%, at the close on Wednesday, November 30th, 2016, having vacillated between an intraday high of $18.37 and a low of $17.54 during the session. The stock’s trading volume was at 2,712,552 for the day. The Company’s market cap was at $4.43 billion as of Wednesday’s close.

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