Pilgrim's files for bankruptcy, weighs on rivals

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By Bob Burgdorfer

CHICAGO (Reuters) - Pilgrim's Pride Corp , the largest U.S. chicken company, filed on Monday for voluntary bankruptcy protection after struggling this past year with high feed costs and low meat prices.

The news halted trading in Pilgrim's Pride shares, which were down 46 percent, and weighed on stocks of competitors Tyson Foods Inc and Sanderson Farms Inc .

Pilgrim's Pride said it intends to operate normally while it develops a reorganization plan and said that after making a round of cutbacks earlier this year, it has no current plans to close additional plants or lay off more employees.

"This was not a surprise," Paul Aho, economist at the consulting firm Poultry Perspective, said of the filing. "It was a horrible year for the poultry industry."

The chicken industry has been hit hard by high costs for feed grain and fuel. Companies have been unable to raise chicken prices enough to offset these costs because a slowing economy has had consumers buying less.

In November, Tyson Foods, the No. 2 chicken producer, lost $91 million on chicken in its latest quarter but posted a small profit due to its beef and pork units.

"They started out the year highly leveraged, compared with their peers," Aho said of Pilgrim's Pride. "Then things fell apart with the low chicken prices and the hedging at the wrong moment."

HEDGING LOSSES HURT

Pilgrim's tried to protect itself from even higher feed grain prices by buying grain in advance of use, a practice called hedging. Unfortunately, that hedging occurred right before grain prices tumbled, which left Pilgrim's with a lot of expensive feed.

On Friday, the company said it lost $96.9 million in its fiscal quarter ended September 27 on such hedges

While a bankruptcy filing had been anticipated by analysts after Pilgrim's sought repeated extensions from creditors on a debt covenant, there apparently was hope that it could have been avoided.

"Bankruptcy was anticipated but not a given," Ken Goldman, J.P. Morgan analyst, said in a research note. "Right or wrong, some investors believed that Chapter 11 could be avoided."

For Pilgrim's Pride, which produces about a quarter of the nation's chicken, conditions have been worse than for its competitors.

In addition to high feed costs, the company has been hurt by debt obligations from its 2006 acquisition of smaller rival Gold Kist Inc.

"After careful consideration of all available alternatives, the company's Board of Directors determined that a Chapter 11 filing was a necessary and prudent step and the best way to obtain the financing necessary to maintain regular operations and allow for a successful restructuring," Chief Executive Clint Rivers said in a statement.

NEARLY $1 BLN LOSS

In a Securities and Exchange filing on Friday, the company said it anticipated reporting a net loss for the fiscal year ended September 27 of $998.6 million, or $14.40 per share.

"We expect to emerge from this restructuring a stronger, more competitive company that is well-positioned for growth and enhanced profitability," Rivers said.

Its Mexican operations and some U.S. operations were not included in the bankruptcy filing and will operate outside of the Chapter 11 bankruptcy process, the company said.

It has been speculated that Pilgrim's Pride could sell assets to help recover, but there was no mention of that in Monday's filing.

"We believe that Pilgrim's Pride needs about $250 million to $300 million in order to make it to the other side of the cycle," Farha Aslam, analyst with investment banker Stephens Inc, said in a note prior to the bankruptcy announcement.

"Assets that could be sold quickly are the Mexico operations, estimated sale price $150 million to $200 million; the egg business, $25 million to $50 million; and two rendering plants, $5 million," she said.

In conjunction with Monday's filing, Pilgrim's asked for approval to enter into a $450 million debtor-in-possession financing facility arranged by Bank of Montreal as lead agent.

If approved by the bankruptcy court, the financing would provide an immediate source of funds and enable Pilgrim's Pride to cover obligations for its daily operations, including timely payment of wages, the company said.

Trading in Pilgrim's Pride shares was halted Monday morning after they fell 53 cents, or 46 percent, to 62 cents per share. Just less than a year ago, on December 11, 2007, the stock traded as high as $29.59.

In afternoon trading Tyson Foods shares were down 55 cents or 8.2 percent at $6.16, while shares of Sanderson Farms, the No. 4 chicken producer, were off $3.53 or 11.3 percent at $27.65.

(Reporting by Bob Burgdorfer, editing by Gerald E. McCormick)

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