Geoff Gannon October 13, 2006

Gold Kist Rejects $20 a Share Offer From Pilgrim’s Pride

Yesterday, the board of poultry producer Gold Kist (GKIS) rejected a $20 a share offer from rival Pilgrim’s Pride (PPC):

“(The) Board of Directors has rejected as inadequate Pilgrim’s Pride Corporation’s unsolicited tender offer to acquire all outstanding shares of common stock of Gold Kist at a price of $20.00 per share, and strongly recommends that its stockholders not tender their shares.”

Gold Kist’s President and CEO John Bekkers explained the decision:

“Our Board unanimously determined that the offer is inadequate and does not fully reflect the value of Gold Kist, including the Company’s strong market position and future growth prospects… We have successfully positioned ourselves to take advantage of attractive growth opportunities in key markets and are confident in our prospects.”

The board claims it is continuing to explore strategic alternatives. The reasons outlined in support of the board’s decision are fairly standard. However, one point does ring true: “(the offer) was made at a time when Gold Kist’s stock price was temporarily depressed following a recent cyclical downturn in the industry.”

Some of you may remember I wrote about the offer when it was first made public (which was quite some time after Pilgrim presented the offer to Gold Kist’s board).

My post didn’t go over well, because I was misunderstood – no doubt because my writing was sloppy and unclear (as can often happen when employing a medium that allows for such a quick transmission of ideas). In my original post, I did not intend to say that individual investors who own shares of Gold Kist would be better off taking stock rather than cash. As they could trade their cash for stock anyway (i.e., they could buy shares of Pilgrim’s Pride for themselves), individual investors are obviously better off receiving that most liquid of assets – cash.

What I meant to say was that Gold Kist’s board should have requested a show of good faith from Pilgrim’s Pride before sitting down to discuss possible terms for a friendly deal. The sign they should have demanded was an all-stock offer of comparable value (based on current market prices) to the $20 a share all-cash offer.

Why? Because an all-cash offer allows Pilgrim’s Pride to exploit any general (and temporary) undervaluation of poultry producers in the stock market. Pilgrim’s Pride made an offer that was more than 50% above the quoted price for shares of Gold Kist. However, if all poultry producers are currently undervalued, that premium may not even make up for the market’s irrational pessimism towards the poultry companies.

Conversely, an all-stock offer would have the effect of eliminating any general (i.e., non-company specific) market pessimism. If Pilgrim’s Pride made such an offer, it would prove that they were not attempting to profit from avian flu fears; but, rather saw Gold Kist itself as a bargain – either because of alleged synergies, or because the company was simply undervalued relative to the other poultry producers.

In essence, an all-stock offer would represent a promise from Pilgrim’s Pride that it was not making an insulting offer to a competitor simply because that competitor was a public company and so its owners would be stupid enough to take Mr. Market’s most recent offer as a good approximation of their business’ value.

The issue is not whether Pilgrim’s Pride made an offer that was well above the market price. That fact is not in dispute. Pilgrim’s Pride offered a tremendous premium to Gold Kist’s share price (at that time).

The issue is whether Pilgrim’s Pride made an offer that was enticing as judged against Gold Kist’s value to a private owner. In this regard, there can be no certainty; however, it seems clear that the offer made by Pilgrim’s Pride does not represent a great premium to what Gold Kist would be worth to a single 100% owner. In fact, I suspect the $20 a share offer is below Gold Kist’s business value.

I said as much in my original post:

“…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… investors shouldn’t view the deal as a value creating combination when it is clearly an opportunistic attempt to buy something for less than it’s worth.”

“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.”

Finally, I will make the same point now that I did then:

“…the easiest way to ensure a good deal would be to insist Pilgrim’s Pride puts its stock where its mouth is. If both Pilgrim’s Pride and Gold Kist are undervalued, paying for Gold Kist in stock would require the swapping of one undervalued asset for another. That would make for a true combination. Of course, it also might make the deal a lot less attractive for Pilgrim’s Pride.”

I still think this is true. If Gold Kist’s board is honestly determined to protect the interests of shareholders (rather than merely preserving the company’s independence), it shouldn’t simply reject the offer from Pilgrim’s Pride. Instead, it should ask Pilgrim’s Pride to put its money where its mouth is. Pilgrim’s Pride can prove it isn’t merely trying to grab a valuable asset based on an irrational quoted price. All the company has to do is offer stock in place of cash.

That would prove that the deal isn’t attractive solely because all publicly traded poultry stocks are being priced irrationally – and that would be a big step towards convincing Gold Kist’s owners that Pilgrim’s Pride is behaving in an open, honest, and honorable manner.

If Pilgrim’s Pride can’t provide such a sign of good faith, then there is nothing to talk about. Negotiating with such an opportunistic buyer is dangerous.

Though it may sound quaint, I don’t believe there is anything to be gained by sitting at the table with someone who is betting on your stupidity. From what I have seen so far, I fear that Pilgrim’s Pride is doing precisely that.

It looks as if Pilgrim’s Pride intends to distract Gold Kist’s owners with a flashy premium over the market price, so it can pick their pockets.

Sadly, I expect most of Gold Kist’s owners will be congratulating themselves as they pocket the cash, never thinking that the asset they sold was worth more than the cash they received.

Of course, Pilgrim’s Pride can only attempt such a brazen act, because it has the most valuable co-conspirator of all – Mr. Market.

Gold Kist’s owners know what the quoted price of their stock is. I just want to make sure they’re considering what the value of their business is.

Related Reading

On Pilgrim’s Pride and Gold Kist