December 3/Americas Food and Drink Insights-- Pilgrim's Pride filed for Chapter 11 bankruptcy protection after struggling to contend with high debts, low poultry prices and rising feed costs. Over the last month, Pilgrim's has repeatedly sought extensions from creditors on its debt covenants, but the latest extension expired on December 2 and the firm appears to have been unable to persuade its creditors to extend again. The firm will now attempt to maintain regular operations while it undergoes a period of restructuring which is likely to involve the sale of multiple assets.

Poultry companies in the U.S. have all struggled over the last year, as rising costs for fuel and feed have coincided with falling demand, as consumers reign in spending in the wake of the economic downturn. In addition, ample supply has meant that firms have struggled to raise prices to offset these additional costs. However, Pilgrim's Pride entered the current downturn in a particularly weak position as it is highly leveraged following the $1.1 billion purchase of smaller rival Gold Kist in January 2007.

Pilgrim's Pride is the largest chicken producer in the U.S. and accounts for around a quarter of the entire chicken market. The firm derives the majority of its sales from the foodservice sector and generated revenues of $7.6bn in 2007. This focus on the foodservice sector can perhaps be held partly accountable for Pilgrim's difficulties, as the sector has been hit very hard by consumers dining out less and offers very low margins when there is an oversupply of chicken due to the lack of product differentiation.

Demand for poultry in the retail sector had fallen off much less quickly, and the sector is also less price competitive thanks to the additional margins offered by strong brand names and prepared products with greater added value. This is reflected in the current resilience of rival producer Sanderson Farms which has faced the same difficulties as Pilgrim's but is primarily focused on the retail sector and has continued to just about break even throughout 2008. In its last quarterly trading update, the firm revealed that "while retail and export demand for chicken remained relatively strong during the quarter, casual dining and foodservice customers have been affected by a significant decline in restaurant traffic due to weak economic conditions and higher fuel prices."

The Vultures Circle
Pilgrim's is now likely to sell off a number of assets to pay down its debts and it has been estimated that the firm needs to raise between $250-300 million to make it through the current economic downturn. Assets that could be sold include Pilgrim's Mexican operations, which could raise up to $200 million and its egg business which could raise up to $50 million.

Potential buyers for the Mexican business could include Industrias Bachoco, the country's largest poultry producer, and Tyson, which has recently been expanding its poultry business in Latin America. Another firm that could take part in a fire sale of assets is Sanderson Farms which informed the SEC in October that that it might sell up to $1 billion worth of shares to fund acquisitions. When the firm filed the notice Sanderson's chief financial officer Michael Cockrell prophetically suggested that there were companies in the industry that were losing money at an unsustainable rate and that Sanderson wished to put itself in a position to move quickly if an opportunity presented itself.

From the December 5, 2008, Prepared Foods e-Flash