Private Equity Loves Chicken

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

New York-based asset management firm Blackstone Group (NYSE: BX) has placed a formal final buyout bid for Australian poultry producer Ingham's Chicken. Along with fellow private equity outfit TPG Capital, Blackstone is vying to take control of Australia's largest bird-products firm in a deal that has been valued at more than $800 million. In a relatively rare move, both of the bidders would need to use substantial leverage from U.S. sources to finance the bid. Since Ingham's is wholly owned by a single shareholder, the deal hinges on his whims and might not be set in stone until the last minute. At this point, it is not known if Ingham's Chicken owner Bob Ingham prefers Blackstone's somewhat less complex bid to TPG's.

About the Blackstone Group and Ingham's Chicken

The Blackstone Group is the largest U.S.-based private equity firm in existence. It aggressively targets both distressed and growing companies for leveraged buyouts, and manages a portfolio of assets valued at more than $200 billion. The company also engages in a variety of other financial-services activities, including wealth management, financial advising, hedge fund management and real estate management. The company employs nearly 2,000 people in New York and elsewhere. In 2012, Blackstone earned $218.6 million on gross revenues of $4 billion.

Ingham's Chicken is a privately-held poultry producer that occupies a prominent place in the Australian food-service economy. Although the company has no direct U.S. analog, it enjoys a competitive advantage over other homegrown poultry producers that is similar to Tyson's (NYSE: TSN) advantage in the U.S. market. The company sells a variety of prepared and fresh chicken products, including meat cuts, eggs, breaded chicken and organ meat. As a privately-held company, Ingham's does not release detailed financial statements. However, its annual sales total at least $2 billion.  Compared to Tyson’s $33 billion in revenue, this is quite small.  Tyson, however, also produces and distributes other meats such as beef and pork.  Judging by Tyson's $1 billion operating cash flow in the last 12 months with an $8.5 billion market value, the meat production business has become a great cash flow business.  This is cash flow that private equity funds would love for re-investments.  Plus, this cash flow to market value ratio is not based on a company filled with debt.  Tyson has long term debt of $2.43 billion, which is small compared to their assets of almost $12 billion.  

How the Deal Is Structured

Although no deal has yet been announced, it is assumed that either private equity firm will use a combination of cash and leverage to purchase Ingham's Chicken from Bob Ingham. While it is possible that Ingham will take on some of the debt notes that Blackstone or TPG uses to finance the deal, it seems more likely that he will simply accept a straight cash payment for the company. If this occurs, either Blackstone or TPG will increase its leverage substantially.

Notable Issues and Complications

This will mark the first time in nearly six years that a U.S. firm has initiated a leveraged buyout of a company based in Oceania. Since it signals a resurgence in U.S.-based banks' risk appetites after a recession-induced slumber, this is a tremendously encouraging development. This development also signals a "restart" for the faltering Australian buyout market. It may well herald the beginning of a period of consolidation for many businesses in Oceania and Southeast Asia. Of course, such a trend would create plenty of profit opportunities for savvy investors.

While it is possible that a deal between Ingham's and either Blackstone or TPG could fall apart due to a disagreement over its final terms, such an outcome seems unlikely. Unless a rival bidder steps in at the last moment, the winning bidder appears likely to become Ingham's sole owner.

Long-Term Outlook and Prospects

It should be noted that several other companies placed preliminary bids for Ingham's before dropping out of contention in late 2012. These included Chinese dairy and poultry outfit New Hope Group, Thai farm products conglomerate C.P. Foods, and a consortium of private equity firms that included Kohlberg Kravis & Roberts (NYSE: KKR). KKR already own a food production and distribution company, Del Monte.  Although KKR’s Del Monte is in the vegetables and fruits space, there may have been ways the two businesses could collaborate on products.  Also, KKR could easily invest a portion of the company’s price with their $1.37 billion in cash.  Ironically, these bidders dropped out of contention for the property before the deal's estimated value was revised downward by a substantial margin. Although Ingham's was initially thought to be capable of fetching up to $1.5 billion, it now appears likely that it will sell for less than $850 million.

Of course, this is not to say that the company is not a valuable property that could create long-term value for its new owner. On the contrary, it appears likely that the company will thrive under the capable direction of a seasoned asset management firm. Assuming that Australia's economy remains robust during the coming years, it seems reasonable to expect Ingham's Chicken to maintain its competitive advantage. If Blackstone is selected as the winning bidder, its public shareholders could stand to earn a substantial return on their investments in the company.

In due time, the company may attract renewed attention from some of the same players that placed preliminary bids this time around. In the resultant sale, Blackstone could earn a substantial premium on its investment and create real value for its shareholders. Alternatively, Blackstone could reward its shareholders by spinning the company off as a public concern and offering its stock as a tax-free dividend.

In sum, the pending Ingham's Chicken buyout is attractive as a standalone deal and a harbinger of future leveraged buyouts in Oceania and the Pacific Rim. While this is certainly not the largest leveraged buyout that the region has ever seen, it is large enough to indicate a renewed appetite for global risk among U.S. lenders. Even those investors who wish to remain on the sidelines for this deal should start scanning the horizon for signs of similar buyouts in the near future.


Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure