Gold Kist Goes Public

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Gold Kist Goes Public

• An Analysis of the IPO

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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 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 www.goldkist.com.

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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.

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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)  
244 Perimeter Center Parkway, N.E. Atlanta,
Georgia 30346 [phone] (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 30346 [phone] (Name, address,
including zip code and telephone number,
including area code, of agent for service)
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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.
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Blank in the S-1 Filled in Day of the Offering
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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
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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.
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The Offering
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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.

 
 
 
 
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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).

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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.  

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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.

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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.

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(No Transcript)
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Gold Kist FCF
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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.

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Gold Kist Unaudited FCF
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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 . . .

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Performance Comparisons

• Typically limited data on IPO firms.
• Duh!
• Solution Comparable firm and ratio analysis.

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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?

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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.

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Chicken Industry

• Low barriers to entry.
• Profits breed new entrants.
• Many established players.
• Tyson
• Perdue
• Sanderson Farms
• Pilgrims Pride

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Macro Economic EnvironmentPounds Produced
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Analysis

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

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Macro Economic EnvironmentAggregate Value
Produced
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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.

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How has the Competition Done?
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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?

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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.

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Valuation Multiples
Assumes GKI sells for 15 per share and uses
June 2003 data. Cash flow and FCF as defined by
Business Browser.
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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.

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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.

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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.

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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.

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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?