Pilgrim's Pride at end of temporary credit line

The sky could be falling on Pilgrim's Pride Corp., the chicken industry's biggest producer.

With its temporary financing ending on Tuesday and credit markets tight all around, the company faces an uncertain future. Some analysts say it could file for bankruptcy, though Pilgrim's Pride has said that option is unlikely. Others say the company is ripe for a buyout, either in whole or in part, by competitors.

Whatever the case, analysts say Pilgrim's Pride, whose chairman has been with the company since its beginnings six decades ago, must change.

"We find it unlikely that the company, under pressure from its bankers and advice from its consultant, will continue in its current form," Deutsche Bank North America analyst Christina McGlone wrote last week. "Essentially, Pilgrim's Pride as we know it today will cease to exist."

Company spokesman Gary Rhodes said Pilgrim's Pride won't be making any comments. Earlier this month, he was widely quoted as saying that filing for bankruptcy wouldn't be in "anyone's best interest."

He told The Associated Press this month that the company was working on a plan to help it address industry woes like weak demand and pricing and an oversupply of chicken. He also said it was looking at opportunities to refinance and find more ways to operate more efficiently.

"We recognize that, given the recent uncertainty in the stock market and the credit markets, there will be speculation and rumors about Pilgrim's Pride," he wrote in an e-mail.

The company's stock tumbled sharply in late September on worries about its credit and future, and has nearly eroded. It closed Friday at $2.17, down 12.5% or 31 cents. It's down nearly 93% from its 52-week high of $30.15.

The entire meat industry is hurting, but Pilgrim's — which has just under a quarter of the chicken market — is perhaps more so because of its high debt rate and bad bets on hedging, analysts say.

Producers have seen their profit margins shrink as costs for commodities like corn and oil rose this year. They tried to hedge their purchases, but as those prices have moderated, some are losing money on the deals. Pilgrim's Pride cited hedging woes in predicting a "significant loss" for the fourth quarter last month.

Chicken producers can't pass through price increases due to an oversupply on the market and weakening demand. Much of that is from a loss of key business in restaurants as consumers opt to eat at home more often to save money.

Mike Cockrell, chief financial officer for Sanderson Farms Inc., said business is tough. It's prime wing eating season, he points out — with fans watching football and the World Series — but the down economy is keeping people from going out. Normally the company can't keep up with demand. Now they have truckloads of extras.

"Our whole industry is challenged right now," he said. "We got high corn and soybean meal prices and very, very weak domestic demand for chicken, particularly from the consumer who eats away from home."

Since much of the industry is hurting, it's not likely that Pilgrim's Pride's lenders would encourage it to file for Chapter 11 bankruptcy protection, said Barclays Capital analyst Christopher Bledsoe.

He said if that happened, the Pittsburg, Texas-based company would have to sell its assets, including chicken products, which would flood the market and push prices downward. That then would hurt competitors, many of whom receive financing from the same sources.

"If you're an agriculture lender like some of Pilgrim's Pride's lenders are, then you risk throwing your other customers, your other loans, into a further distressed situation," he said.

Tightening credit markets — amid a weakening global economy — are making it more difficult for many companies to get financing, particularly one like Pilgrim's Pride, Bledsoe said. The company carries a large debt load primarily from its $1.3 billion acquisition of rival Gold Kist Inc. in early 2007, which made it the nation's biggest chicken producer.

Instead, he said, the banks may prefer Pilgrim's Pride to be sold either outright or at least in part, preferably to someone with a stronger balance sheet.

Tyson Foods Inc., the second biggest chicken producer, has about $1.5 billion in liquidity, Bledsoe said, so it could afford to buy a portion of Pilgrim's Pride. A total buyout, which would put about 45% of the market into one company, wasn't likely to pass anti-trust clearance, he said.

Gary Mickelson, a spokesman for the Springdale, Ark.-based company, said Tyson had no comment.

Sanderson Farms, the nation's fourth-largest chicken producer with about 5.6% of the market, is widely considered a potential player. Earlier this month the Laurel, Miss.-based company filed a shelf registration with the Securities and Exchange Commission to sell up to $1 billion in stock to potentially fund future acquisitions or other strategic opportunities.

Cockrell, Sanderson's CFO, said the company didn't have anything specific to say about potential buyouts — of players big or small. But the company is examining its options.

"If assets became available no matter where they come from, we'll certainly look at them," he said.

Pilgrim's future no doubt must pass the muster of Lonnie "Bo" Pilgrim, the senior chairman of the board. Bledsoe said Pilgrim is the beneficial holder of a company that owns more than 30% of the stock and maintains voting rights over 60% of the company's stock.

His history with the company started when his brother, Aubrey Pilgrim, and a partner bought a feed and seed store in 1946. According to the company's website, Lonnie "Bo" Pilgrim soon joined on and took over as leader in 1966 after his brother's death.

He's been there as the company grew to reach sales of $7.6 billion in fiscal 2007. Pilgrim's Pride employs some 53,500 people in the U.S. and Mexico at about four dozen chicken processing and packaged-food plants, according to the website.

Despite the slumping economy, better days are expected for the chicken industry. Poultry companies are following through on production cuts, which will boost prices. Bledsoe said the number of eggs being laid for chickens — a good indicator of chicken production — is at its lowest year-over-year level of the decade and feed costs are down half from their highs earlier this year.

"That dynamic sets up for a period of pretty good profitability in chicken," he said.