On Friday, integrated poultry producer Pilgrim’s Pride (PPC) publicized its offer to acquire smaller rival Gold Kist (GKIS) for $20 per share. The offer values Gold Kist at roughly $1.16 billion including the assumption of $144 million in debt. The $20 a share cash offer represented a nearly 55% premium over Friday’s closing price of $12.93.
Since the offer was made public, the market price of Gold Kist’s shares has risen to $19.88.
On Friday, Pilgrim’s Pride put out a press release that included the text of a letter delivered to Gold Kist’s board (that same day). In the release, Pilgrim’s Pride claimed it has “substantial current liquidity” and that its financial advisors have given the company “further assurances” that Pilgrim’s Pride has the ability to finance the transaction.
The release also suggested the transaction would be accretive to EPS in the first full year following the merger; the combined company would enjoy approximately $50 million in anticipated synergies. During 2005, Gold Kist had sales of over $2.3 billion while incurring Selling, General, and Administrative costs (SG&A;) of just $112.2 million. So, these anticipated synergies would likely come from the cost of goods sold line. Pilgrim’s Pride suggested as much in the release by stating such synergies were “expected to come primarily from the optimization of production and distribution facilities and cost savings in purchasing, production, logistics, and SG&A;”.
A Fair Price?
The letter to Gold Kist’s board is generally unremarkable, being full of the usual platitudes such as “value creation for our respective shareholders, employees, business partners and other constituencies”. Considering the price at which Gold Kist currently trades, the limited expected synergies, and the fact that the current proposal is for an all cash deal, it seems far more likely Pilgrim’s Pride is looking to create value for its shareholders by capturing the wide spread between the market price of Gold Kist and the company’s value to a 100% owner.
Pilgrim’s Pride shouldn’t be faulted for trying to exploit such an opportunity. However, investors shouldn’t view the deal as a value creating combination when it is clearly an opportunistic attempt to buy something for less than its worth.
The letter did state that Pilgrim’s Pride is “willing to discuss alternative forms of consideration, including a mix of cash and Pilgrim’s Pride common stock”. We’ll see what this means in the days ahead.
I suspect it means some small amount of stock as a sweetener rather than a radically different mix of cash and stock. The reason for this is obvious. Shares of Pilgrim’s Pride are probably worth a lot more than their quoted price; so, a deal consisting of a large amount of stock in place of cash would actually be a big step up in the true amount of economic consideration given in exchange for Gold Kist’s operations.
Now, some may argue that this deal is aimed in large part at capturing synergies rather than exploiting a difference between the price and …Read more