Gold Kist Goes Public
An Analysis of the IPO
What is Gold Kist?
Straight from the latest 8-K:
Gold Kist is the third largest integrated broiler company
in the United States, accounting for more than 9 percent
of chicken, or broiler, meat produced in the United States
in 2003. Gold Kist operates a fully-integrated broiler
production business that provides processing,
purchasing and marketing services to its contract
growers. Gold Kist’s broiler production operations
include nine broiler complexes located in Alabama,
Florida, Georgia, North Carolina and South Carolina. For
more information, visit our website at
www.goldkist.com.
Translation
• Gold Kist sells a lot of chickens. About 9%
of the total consumed in the U.S.
• They raise their chickens in the south east.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GOLD KIST HOLDINGS INC.
(Exact name of registrant as specified in its charter)
2015
20-1163666
(Primary Standard
Industrial
Classification Code
Number)
(I.R.S. employer
identification number)
Delaware
(State or other
jurisdiction of
incorporation or
organization)
244 Perimeter Center Parkway, N.E.
Atlanta, Georgia 30346
(770) 393-5000
(Address, including zip code, and telephone number, including area code, of the Company’s principal executive offices)
J. David Dyson
General Counsel, Vice President and Corporate Secretary
244 Perimeter Center Parkway, N.E.
Atlanta, Georgia 30346
(770) 393-5000
(Name, address, including zip code and telephone number, including area code, of agent for service)
18,000,000 Shares
Gold Kist Holdings Inc.
Common Stock
This is the initial public offering of our common stock. The offering is
being made in connection with the conversion of Gold Kist Inc. from a cooperative
marketing association organized under the Georgia Cooperative Marketing Act to
a for profit corporation organized under the laws of Delaware. All of the shares of
common stock being sold in this offering are being sold by Gold Kist Holdings Inc.
In addition to these shares, an estimated 32,000,000 shares of our
common stock will be issued to Gold Kist’s members and former member equity
holders in the conversion.
We expect the public offering price to be between $14.00 and $16.00 per
share. Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will trade on the New York Stock Exchange
under the symbol “GKI.”
Blank in the S-1: Filled in Day of
the Offering
Public offering price
Per Share
$
Total
$
Underwriting discount
$
$
Proceeds, before
expenses, to Gold Kist
Holdings
$
$
The underwriters may also purchase up to an additional 2,700,000 shares from Gold Kist
Holdings Inc. at the public offering price, less the underwriting discount, within 30 days from the date
of this prospectus to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
The shares will be ready for delivery on or about
, 2004.
Merrill Lynch & Co.
SunTrust Robinson Humphrey
Piper Jaffray
The Conversion
(emphasis below mine)
On May 24, 2004, the Board of Directors of Gold Kist unanimously
approved a plan of conversion pursuant to which Gold Kist will convert from a
cooperative marketing association organized under the Georgia Cooperative
Marketing Act to a for profit corporation organized under the laws of Delaware by
merging into its wholly owned subsidiary Gold Kist Holdings Inc., which we
sometimes refer to as New Gold Kist. The completion of this offering by New
Gold Kist is a condition to the conversion.
In connection with the conversion, we currently estimate that members
and former member equity holders of Gold Kist will receive shares of the
common stock of New Gold Kist and cash in an aggregate amount of
approximately $600.0 million, consisting of an estimated $480.0 million of
common stock and $120.0 million of cash. These estimates are based on the
sale of 18 million shares in this offering at $15.00 per share, which is the
midpoint of the estimated price range set forth on the cover page of this
prospectus; the use by New Gold Kist of approximately $150.0 million of the
gross proceeds from this offering as discussed under “Use of Proceeds” herein;
and the distribution of 32 million shares of the common stock of New Gold Kist to
Gold Kist’s members and former member equity holders in the conversion.
These assumptions are discussed in more detail under “Unaudited Pro Forma
Consolidated Financial Information.”
The Offering
Common stock offered by us
18,000,000 shares
Common stock to be
outstanding after the offering
50,000,000 shares
Proposed NYSE symbol
“GKI”
Use of proceeds
To reduce a portion of our existing debt,
to redeem a portion of our outstanding
notified equity in connection with the
conversion and for general corporate
purposes, including our ongoing
business operations.
Footnotes
Except as otherwise noted, all information in this prospectus assumes:
•the issuance of 32,000,000 shares of common stock and the payment of
$120.0 million in cash in connection with the completion of the conversion
whereby Gold Kist, a cooperative marketing association organized under
the Georgia Cooperative Marketing Act will merge with and into Gold Kist
Holdings, a for profit corporation organized under the laws of Delaware,
immediately prior to the close of this offering;
•that all members and former member equity holders of Gold Kist will
have their outstanding notified equity and member’s interests redeemed
for cash or exchanged for our common stock; and
•that the underwriters do not exercise their over-allotment option.
How Much Does Gold Kist Get?
• We estimate that the net proceeds to us
from this offering, after deducting
underwriting discounts and other
estimated expenses, will be approximately
$248.4 million, or $286.3 million if the
underwriters exercise their over-allotment
option in full assuming a public offering
price of $15.00 per share (the midpoint of
the estimated price range set forth on the
cover page of this prospectus).
What will They Do With the $
• We intend to use approximately $121.5 million of the net proceeds
from this offering to pay the following existing indebtedness and
related prepayment penalties:
– Term Loan Credit Facility. As of March 27, 2004, we had
approximately $9.6 million outstanding under our Term B term loan from
our credit facility with an agricultural bank. The Term B loan matures on
December 31, 2007, with semi-annual principal repayments of $0.6
million and interest due monthly, with a variable interest rate, which was
4.67% on March 27, 2004. We intend to repay in full our outstanding
Term B loan.
– Senior Notes Due 2014. As of March 27, 2004, we had $200.0 million
outstanding under our 10¼% senior notes due 2014. The notes mature
on March 15, 2014 and require semi-annual interest payments. We
intend to repay $70.0 million aggregate principal amount of our
outstanding senior notes plus an additional $7.2 million of prepayment
penalties.
More Debt to Pay Off
– Subordinated Capital Certificates of Interest. As of March 27,
2004, we had approximately $18.2 million in outstanding
subordinated capital certificates of interest with fixed maturities
ranging from seven to fifteen years from the date of issuance,
and interest left on deposit of $7.6 million. The certificates bore
an average weighted interest rate of 8.14% at March 27, 2004.
We intend to redeem in full our outstanding subordinated capital
certificates of interest, including $1.4 million of prepayment
penalties.
– Industrial Revenue Bond. As of March 27, 2004 we had $7.5
million outstanding on an industrial revenue bond due in July
2015. The industrial revenue bond had an average interest rate
of 1.06% for March 2004. We intend to repay in full our
outstanding industrial revenue bond.
That Leaves . . .
• We expect to use up to approximately $120.0 million to
redeem certain outstanding membership interests and
notified equity of our members and former equity holders
in connection with the conversion, immediately after the
closing of this offering.
• If the underwriters exercise their over-allotment option in
full, we will distribute an estimated additional $40.5
million to our members and former member equity
holders in connection with the conversion.
• We expect to use the remaining proceeds of
approximately $6.9 million for general corporate
purposes, including our ongoing business operations.
Gold Kist
Historical
Cash and cash equivalents
New
Gold Kist
Pro Forma,
as Adjusted
93,526
100,395
Series B Senior Exchange Notes
21,818
21,818
Series C Senior Exchange Notes
20,454
20,454
Debt, including current maturities:
Senior Credit Facility(1)
—
—
Term Loan A
32,150
Term Loan B
9,600
—
18,204
—
Industrial Revenue Bond
7,500
—
Other debt
2,812
2,812
196,940
128,011
309,478
205,245
Subordinated Capital Certificates of Interest
10 1/4% Senior Notes, net of discount of $3,060 actual
and $1,989 pro forma, as adjusted
Total debt
32,150
Gold Kist FCF
Jun-01
31,811
Jun-02
69,760
Jun-03
-39,839
EBITDA
Net CapEx.
Δ Working Capital
Cash Interest Paid
74,558
-33,495
18,131
39,538
108,831
-38,899
-29,159
31,125
-344
-34,651
691
25,571
Cash Taxes Paid
Tax Rate Using Net Income
FCF
-6,042
28.70%
25,698
7,831
31.65%
1,817
-5,855
25.17%
-54,020
27,432
NA
NA
-662
276,270
11.27%
-52,546
346,173
8.22%
EBIT
All Equity FCF
Debt
Interest Rate
Audited Financials
• The audited financials are over a year old.
• For Gold Kist buyers this is problematic.
– Many investors use ratios to determine the price they
will pay.
• Any ratios will be out of date.
– For those using a FCF analysis there is limited data
with which to do projections and this data is old.
• Solution: Provide more recent but unaudited
data.
Gold Kist Unaudited FCF
9 Mo.’s
Ending
Mar-03
9 Mo.’s
Ending
Mar-04
EBIT
-55,916
145,867
EBITDA
-26,555
175,405
Net CapEx.
-27,402
-19,767
Δ Working Capital
-4,014
11,483
Cash Interest Paid
18,940
33,236
Cash Taxes Paid
-5,849
-1,548
Tax Rate Using Net Income
24.13%
41.04%
FCF
-71,062
135,433
All Equity FCF Tax Rate I
-69,651
136,068
Debt: Note, no data given for Mar '03 Bal.
346,173
296,042
5.47%
10.35%
Interest Rate
Items to Note
• After a poor 2002 (FCF = 1817) and a
horrible 2003 (FCF = -54,020) things have
suddenly turned around!
• FCF for the nine months ending March
2004 = 135,433!
• And what is the firm doing now . . .
Performance Comparisons
• Typically limited data on IPO firms.
– Duh!
• Solution: Comparable firm and ratio
analysis.
Comparable Firms
• Use to asses what information you have.
– Were 2002 and 2003 particularly difficult
years in the chicken industry?
• If so perhaps Gold Kist’s performance implies
better than industry average profits going forward?
– What can we learn about the performance of
other firms in 2004?
– What is the competition planning to do? How
will that impact Gold Kist?
Use Economics
• You mean use something from a core class?!
– Yep!
• What are the barriers to entry?
– Low implies future profits will be constrained.
– High implies potentially large future profits.
• What are the limits to a firm’s growth?
– What is the largest market share a firm can hope to
acquire?
• What is the competition planning?
– Unlikely to sit back and allow any one competitor to
take market share without fight.
Chicken Industry
• Low barriers to entry.
– Profits breed new entrants.
• Many established players.
– Tyson
– Perdue
– Sanderson Farms
– Pilgrim’s Pride
Macro Economic Environment
Pounds Produced
50
45
0.45
40
35
0.35
0.4
0.3
30
25
20
0.25
$
Millions of Pounds
U.S. Broiler Production
0.2
0.15
15
10
0.1
0.05
5
0
1988
1990
1992
1994
1996
1998
2000
2002
Year
Pounds
Real Price/LB
Nominal Price/LB
Analysis
• Production up substantially.
• Nominal prices between 30 and 40 cents
per pound.
• Some additional recent volatility.
• Real prices: steady decline.
Macro Economic Environment
Aggregate Value Produced
Total Value
Millions of $
U.S. Broiler Production
18
16
0.45
0.4
14
12
0.35
0.3
10
8
0.25
0.2
6
4
0.15
0.1
2
0.05
0
1988
1990
1992
1994
1996
1998
2000
Year
Real Total Value
Nominal Total Value
Real Price/LB
Nominal Price/LB
2002
Analysis
• Real dollar production up only slightly.
– Average of 1.2% per year.
• Most of the production aggregate revenue
increase is due to inflation.
• Conclusions:
– With falling real prices firms must be ever more
efficient to survive.
– Aggregate production is increasing potentially aiding
new entrants in search of currently underserved
clients.
How has the Competition Done?
FCF
Sales
TSN
PPC
CGLA
SAFM
GKI
‘94
‘95
‘96
‘97
‘98
‘99
‘00
‘01
‘02
‘03
-288
-47
-37
409
130
418
357
260
704
497
5110
5511
6453
6355
7414
7621
7268
10563
23367
24549
31
2
-22
0
38
9
33
-17
4
-25
923
932
1139
1278
1332
1357
1499
2215
2534
2619
-17
-57
1
-2
10
-22
-23
-77
-1
-8
364
355
362
332
280
354
314
8
1
-41
-29
24
-1
1
41
31
54
372
393
455
482
521
559
606
706
744
872
26
18
-54
1811
1864
1855
Size and Profits
• Tyson is the big chicken in the industry.
– Size appears to matter. Tyson is generally
profitable in good years and bad.
• 2003 was not a good year for many firms,
not just Gold Kist.
– However, Sanderson Farms weathered the
year quite well.
– Should investigate why. Accounting
legerdemain or real efficiencies?
Long Run Profits
• Note the cyclicality of the free cash flows.
• Typical of a competitive industry.
– High profits encourages entry which drives
profits back down.
– Likely recent industry profits will drop over the
next few years.
• Comparing across firms and years, TSN
should sell for higher valuation multiples
than the competition.
Valuation Multiples
TSN
PPC
CGLA
SAFM
GKI*
Indus.
P/E
14.21
19.08
NA
10.03
17.62
19.06
P/Sales
0.27
0.34
0.23
0.90
0.61
1.64
P/Book
1.61
2.17
1.67
3.51
0.88
4.49
P/Cash
Flow
P/FCF
7.14
8.41
269.24 7.79
33.85
13.54
9.54
6.72
7.92
7.85
37.18
14.07
*Assumes GKI sells for $15 per share and uses June 2003 data. Cash flow and
FCF as defined by Business Browser.
Patterns
• Price has been set to produce ratios near
those of Pilgrim's Pride.
– Of the large publicly traded firms PPC is the
closest in size to Gold Kist.
– Not unusual for the investment bank to set the
firm’s price so its valuation ratios are close to
a competitor of similar size.
• I suspect money the industry ratios are so
much higher because some smaller firms
are losing money.
Will the Issue Sell?
• Since most IPOs experience a jump in
price the first day, they typically sell out.
• Given the price ratios are not that low, and
the firm has been suffering recent losses I
would be surprised if demand was so high
that Merrill Lynch will exercise its green
shoe option.
Should You Buy It?
• If you can get in on an IPO they are
typically profitable, especially if you sell
your shares the first day of trading.
– Long term? I suspect the profits Gold Kist has
generated over last nine month’s will not
continue.
– Profits over the last few years have been lean
for firms of its size. No reason to believe
there will be a long run change in this pattern.
Should They Do It? The Yes’s
• The firm is clearly under competitive and
perhaps even some financial pressure.
• Competition is producing ever lower real
prices for their product.
• The largest firm in the industry seems to
be prospering more than its competitors
implying GKI might be wise to expand.
Should They Do It? The No’s
• Currently GKI is a cooperative association.
– Gives each producer a strong incentive to keep costs
down and make sure the firm operates efficiently.
– Can they provide these same incentives in a
corporate form?
• What happens its current profits are transitory?
– Will the former cooperative survive is corporate
restructuring ever becomes necessary?