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Poultry processor needs more time

Chicken producer Pilgrim’s Pride Corp. needs to convince creditors to give it a few more months to shore up its business, after which it could reap the benefits of lower feed costs and higher meat prices, investment and agricultural industry analysts say.

Pilgrim’s won a temporary reprieve from its lenders last month on a credit covenant.

But with an Oct. 28 deadline on the covenant looming and a deepening global financial crisis, analysts doubt that it will be able to meet its obligations by that time.

“Good profits should be made in 2009, and I think all of these creditors understand that,” said Rich Nelson, an analyst at agricultural consultancy Alledale Inc.

Barclays Capi tal analyst Christopher Bledsoe agrees, saying in a recent note that lenders may show leniency beyond Oct. 28.

An industry source said the company has been talking to lenders about longer-term relief on its fixed-charge covenant.

Investors fear the company is running out of time, sending its stock down nearly 24 per cent on Friday alone.

The company has lost 61 per cent of its value since it warned on Sept. 25 that a significant quarterly loss could put it in covenant default.

Pilgrim’s Pride said Oct. 18 it did not expect to file for bankruptcy protection and was working on a strategy to resolve its problems.

“We are continuing to explore opportunities to refinance and recapitalize our business and to find ways to operate more efficiently,” spokesman Gary Rhodes said.

Morningstar analyst Ann Gilpin said there was a 50 per cent chance that Pilgrim’s Pride would file for bankruptcy, but she said there was still a chance for an extension from creditors.

“The lenders could waive that again and again and again, or they could say ‘no, ’”Gilpin said.

“It depends on what they think the likelihood of getting their money back is,” she said. “I think it is a coin toss.”

Pilgrim’s Pride started as a small Pittsburg, Texas, feed store in 1946.

It now has $7.6 billion in annual sales, the capacity to process 45 million chickens a week, and employs 53,500 people.

Acquisitions in the past five years put Pilgrim’s on the map. The company doubled in size in 2003 with the purchase of ConAgra Foods Inc.’s chicken unit, and grew again in 2007 with a deal to buy rival Gold Kist Inc.

But Pilgrim’s has been losing money for nearly a year due to high costs for feed and fuel and low meat prices. It also is saddled with $1.5 billion of debt from the Gold Kist deal.

Even with heavy debt load, Pilgrim’s could have fared better if chicken prices had not fallen and feed costs had not shot up, said Paul Aho, an economist at consulting firm Poultry Perspective.

If there is a hope for the company, it is the healthy corn and soybean crops that have caused a sharp drop in grain prices. The trend should greatly reduce feed costs for Pilgrim’s Pride and other chicken producers.

“It is looking better now with the fall in grain prices. Pilgrim’s Pride just needs to hang on through the rest of this year,” Aho said.

A Wall Street Journal article Oct. 18 quoted unidentified sources as saying Pilgrim’s Pride may have to seek bankruptcy protection if it failed to raise money or extract concessions from its lenders.

Such a filing could help expedite a sale of the company, two people familiar with the matter told the Journal.

Potential suitors include Tyson Foods Inc. and Mexican chicken and egg producer Industrias Bachoco SA de CV, the Journal said.

Tyson Foods would not comment on the report and Industrias Bachoco did not return a call seeking comment.

Pilgrim’s has closed plants, cut production and hired Bain Corporate Renewal Group to review its operational strategy and investment bank Lazard Ltd. to advise on refinancing.

Pilgrim’s Pride shares have lost more than 85 per cent of their value in the last six months.

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