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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.

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Presentation on theme: "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."— Presentation transcript:

1 Gold Kist Goes Public An Analysis of the IPO

2 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 Gold Kist operates a fully-integrated broiler production business that provides processing, purchasing and marketing services to its contract growers. Gold Kists broiler production operations include nine broiler complexes located in Alabama, Florida, Georgia, North Carolina and South Carolina. For more information, visit our website at

3 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.

4 SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 GOLD KIST HOLDINGS INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. employer identification number) 244 Perimeter Center Parkway, N.E. Atlanta, Georgia (770) (Address, including zip code, and telephone number, including area code, of the Companys principal executive offices) J. David Dyson General Counsel, Vice President and Corporate Secretary 244 Perimeter Center Parkway, N.E. Atlanta, Georgia (770) (Name, address, including zip code and telephone number, including area code, of agent for service)

5 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 Kists 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.

6 Per ShareTotal Public offering price$$ Underwriting discount$ $ Proceeds, before expenses, to Gold Kist Holdings $$ Blank in the S-1: Filled in Day of the Offering

7 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, Merrill Lynch & Co. SunTrust Robinson Humphrey Piper Jaffray

8 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 Kists members and former member equity holders in the conversion. These assumptions are discussed in more detail under Unaudited Pro Forma Consolidated Financial Information.

9 The Offering Common stock offered by us18,000,000 shares Common stock to be outstanding after the offering 50,000,000 shares Proposed NYSE symbolGKI Use of proceedsTo 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.

10 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 members interests redeemed for cash or exchanged for our common stock; and that the underwriters do not exercise their over-allotment option.

11 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).

12 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, We intend to repay in full our outstanding Term B loan. –Senior Notes Due As of March 27, 2004, we had $200.0 million outstanding under our 10¼% senior notes due 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.

13 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, 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 The industrial revenue bond had an average interest rate of 1.06% for March We intend to repay in full our outstanding industrial revenue bond.

14 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.

15 Gold Kist Historical New Gold Kist Pro Forma, as Adjusted Cash and cash equivalents 93,526100,395 Debt, including current maturities: Series B Senior Exchange Notes 21,818 Series C Senior Exchange Notes 20,454 Senior Credit Facility(1) Term Loan A 32,150 Term Loan B 9,600 Subordinated Capital Certificates of Interest 18,204 Industrial Revenue Bond 7,500 Other debt 2, /4% Senior Notes, net of discount of $3,060 actual and $1,989 pro forma, as adjusted 196,940128,011 Total debt 309,478205,245

16 Jun-01Jun-02Jun-03 EBIT31,81169,760-39,839 EBITDA74,558108, Net CapEx.-33,495-38,899-34,651 Δ Working Capital18,131-29, Cash Interest Paid39,53831,12525,571 Cash Taxes Paid-6,0427,831-5,855 Tax Rate Using Net Income28.70%31.65%25.17% FCF25,6981,817-54,020 All Equity FCF27, ,546 DebtNA276,270346,173 Interest RateNA11.27%8.22% Gold Kist FCF

17 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.

18 Gold Kist Unaudited FCF 9 Mo.s Ending Mar-03 9 Mo.s Ending Mar-04 EBIT-55,916145,867 EBITDA-26,555175,405 Net CapEx.-27,402-19,767 Δ Working Capital-4,01411,483 Cash Interest Paid18,94033,236 Cash Taxes Paid-5,849-1,548 Tax Rate Using Net Income24.13%41.04% FCF-71,062135,433 All Equity FCF Tax Rate I-69,651136,068 Debt: Note, no data given for Mar '03 Bal.346,173296,042 Interest Rate5.47%10.35%

19 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...

20 Performance Comparisons Typically limited data on IPO firms. –Duh! Solution: Comparable firm and ratio analysis.

21 Comparable Firms Use to asses what information you have. –Were 2002 and 2003 particularly difficult years in the chicken industry? If so perhaps Gold Kists 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?

22 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 firms 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.

23 Chicken Industry Low barriers to entry. –Profits breed new entrants. Many established players. –Tyson –Perdue –Sanderson Farms –Pilgrims Pride

24 Macro Economic Environment Pounds Produced

25 Analysis Production up substantially. Nominal prices between 30 and 40 cents per pound. Some additional recent volatility. Real prices: steady decline.

26 Macro Economic Environment Aggregate Value Produced

27 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.

28 How has the Competition Done? FCF Sales TSN PPC CGLA SAFM GKI

29 Size and Profits Tyson is the big chicken in the industry. –Size appears to matter. Tyson is generally profitable in good years and bad 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?

30 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.

31 Valuation Multiples TSNPPCCGLASAFMGKI*Indus. P/E NA P/Sales P/Book P/Cash Flow P/FCF *Assumes GKI sells for $15 per share and uses June 2003 data. Cash flow and FCF as defined by Business Browser.

32 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 firms 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.

33 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.

34 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 months 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.

35 Should They Do It? The Yess 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.

36 Should They Do It? The Nos 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?


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