March 13, 2007

 

More mergers and acquisitions expected in poultry sector for 2007

 

 

Even with Pilgrim's Pride's successful takeover of Gold Kist to become the top US poultry producer last year, analysts are saying that there has been relatively little mergers and acquisitions last year and this year would see more of such activities.

 

With bird flu and oversupply conspiring to draw down profits, 2006 was a year poultry producers would rather forget.

 

Normally, more mergers and acquisitions would have been seen during periods where there is a slump in sales. Still, despite the low profits, such activities have been few and far between.

 

This has been due, in part, to the strong profits seen in previous years which initially cushioned the blow for most poultry companies.

 

For the past few years, poultry companies were highly valued in the stock markets, with the Stephens Poultry Stock Index posting an average annual return of 27.8 percent, outperforming both the S&P Food and S&P 500 Indices.

 

From 2003 through 2005, as aggregate net income for top producers doubled through organic growth and acquisitions, so did the EITDA margins.

 

Unfortunately, the events of 2005 and 2006 have caused poultry operating margins and stock prices to drop while EBITDA margins for the top poultry groups was halved and fell back to where they were 4 years before.

 

It was not until the fall of 2006 that higher grain costs and lower poultry prices made its presence felt and most companies began incurring hefty losses.

 

As conditions remained challenging in 2007, more mergers and acquisitions are expected in the industry, analysts said.

 

Problems look set to continue to worsen as higher grain costs and oversupply situation continue to plague the industry.

 

While there is little the industry can do about higher grain prices, it is scaling back production to prevent oversupply. Moreover, this year, unlike the last, would see higher international demand for US poultry as bird flu fears recede.

 

Still, high grain prices, more than sufficient supplies and the spectre of further bird flu outbreaks would make recovery slow for the poultry companies, analysts said.