Pressured Farming Co-Ops Going Public to Spur Growth: A shake-up in food retailing forces co-ops to use stock to raise capital, pursue acquisitions, sharpen competitive abilities

The primary driving force behind the conversion of cooperatives to corporations, with the goal of either going public or obtaining funding from private equity firms, is the need to access the capital markets, garner cash. The cooperatives envision “recapitalization” and the resulting dollars they raise as the means to enhance competitiveness and avoid stagnation. The motivation for the conversion is strictly one of potential growth. There is no tax incentive and, in fact, the co-ops that switch lose the tax advantages of cooperative status. In particular, farming cooperatives owned and controlled by member farmers who share the earnings of the operations increasingly are exploring the for-profit route to raise cash. Traditionally, these co-ops would get capital from profits, reinvesting a portion into the cooperative and distributing the rest to member farmers. But further capital is needed because co-ops’ profits are falling in a food-retailing environment that has undergone a multitude of changes in the last 10 years. Explicitly, the following developments and trends have increased pressure on food suppliers for lower prices and other concessions: * The nation’s major supermarket chains and food wholesalers went through waves of industry consolidation that left fewer, but much larger, players. * There was the rapid rise of mega-retailers such as Wal-Mart, which by 2002 had eclipsed traditional grocery chains to become the nation’s largest food merchant. * The growing popularity of warehouse outlets such as Costco and Sam’s Club, where customers pay an annual fee so that they can buy food and other goods in bulk at discount prices. Co-ops, without an open pipeline to capital, feel the pressure most acutely. To remain profitable and compete with their publicly traded counterparts, the co-op needs to raise additional capital either by going public or taking on private investment. With the infusions of cash, the co-op turned public company can take advantage of growth opportunities, such as developing products and increasing market share, as well as enjoy a choice of cash or stock as an acquisition currency. A key example is Diamond Walnut Growers Inc., Stockton, Calif., which is converting to a corporation known as Diamond Foods Inc. The proceeds from its IPO will be used to pay down debt, distribute cash to members of Diamond Growers in connection with the conversion, and finance growth and general corporate purposes. As a public company with increased capital, Diamond Foods should be better able to take advantage of the growth opportunities presented by increasing demand for nuts to help fight cardiovascular disease. Howard Turetsky is an Associate Professor of Finance and Accounting at San Jose State University. Mary Calegari is an Assistant Professor in the same department. Brand Names Shift To Public Trading The most recent co-op to change to a corporation and go public is Gold Kist Holdings Inc., the nation’s third-largest chicken producer, which sold its stock publicly in October 2004. Two others are in the wings. Gold Kist recorded sales of nearly $2.2 billion in fiscal 2004 and markets its chickens under the Gold Kist Farms and Young n Tender brands. Diamond Foods Inc. filed an offering with the SEC in March 2005. Sales in fiscal 2004 totaled nearly $360 million. Unlike branded foods firms Gold Kist and Diamond, the third would-be public firm, CF Industries Holdings Inc., is a producer of fertilizers. But it shares with them a position in an evolving and consolidating industry. CF is owned by eight regional cooperatives. Sales in 2004 were $1.65 billion. – Mergers & Acquisitions (c) 2005 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com