University of Wisconsin Center for Cooperatives
Rural Cooperatives, July/August 1997, pp. 20-22
Published by the Rural Business and Cooperative Development Service
Restructuring Pays Off for Pro-Fac Following Curtice Burns Deal
W hen Pro-Fac Cooperative of Rochester, N.Y., decided to tender an offer for the purchase of Curtice Burns Foods in 1994, it set the stage for a new chapter in U.S. cooperative history. Pro- Fac eventually won a tense bidding war for Curtice Burns, marking one of the first times a U.S. cooperative has ever acquired a major publicly held food company. Grower-owners of ProFac felt the acquisition was essential to the future success of their cooperative. Control of Curtice Burns would allow them to direct the major processor and marketer of their fruit and vegetable crops. It would also create more opportunities for them to pursue new value-added ventures, which most farmers today view as the long-term key to their future success.
However, "great potential" does not equal "great results," and the first full year of combined operations in 1996 resulted in a $27 million loss. Pro-Fac growers were paid only 90 percent of what they otherwise would have earned for their crops.
A new five-year plan was drafted which identified which products the company would concentrate on, with the overall goal of boosting sales from $800 million to $1 billion by 2001. Major structural changes in the operation were made last year to reduce debt and to put more resources into the core, strategic businesses. Several Curtice Burns subsidiaries were sold, including the canned vegetable business and Finger Lakes Packaging Inc. Other subsidiaries were merged. Overall, the total workforce was reduced from 4,500 to 3,600, although 630 of those workers who left Curtice Burns' payroll kept their jobs with new owners of the subsidiaries.
Business units that were run autonomously now operate as part of one corporate structure. This has required a major change in the mind-set of managers and employees.
"For years, this company boasted of its autonomous divisions, but they are gone now," says Dennis Mullen, Curtice Burns president and CEO. "we are now one company: Curtice Burns Foods. I expect every individual in this organization to accept this and understand that we no longer compete among ourselves," he recently wrote in his monthly column to members and employees.
Some of these moves have been controversial, but they have helped create a dramatic turnaround for the co-opt Total corporate debt has been slashed from $400 million to $235 million, and the cooperative turned the prior year's loss into a net income gain of $14.9 million for the fiscal year that ended June 28, 1997.
Pro-Fac President Bruce Fox, who farms in Shelby, Mich., gives much of the credit for the turnaround to the innovative ideas and management of Mullen. Mullen's ability to translate complex business and financial options into laymen's terms helped him gain support from the farmers, Fox said. "He convinced us to do a lot of things that weren't easy."
"Sometimes adversity is the rallying point," Mullen recently told the Rochester Business Journal. One thing he has never lost sight of, and which he keeps urging all employees to remember, is how the farmers have put their assets on the line to make the consolidated operation a success. "I tell the workers our stockholders are the farmers. They pledged their assets two years ago and these are the guys we need to take care of"
A Unique Partnership
Pro-Fac was bom 36 years ago when a group of small fruit and vegetable producers in western New York realized they could be a stronger and more competitive force if they consolidated. The idea took hold. Pro-Fac Cooperative was legally organized in late 1960, and over 500 fruit and vegetable growers signed on in the following months. They bought common stock in the new cooperative, based on the amount of product they expected to deliver. This investment, plus the retained earnings of Pro-Fac, provided part of the financing.
Syracuse-based Agway, one of the nation's leading farm supply co-ops, suggested forming a joint venture of farmers and processors. It provided financial backing for the new venture: Curtice Burns, which was formed to market and process members' crops. This arrangement provided Pro-Fac members with a market while Curtice Burns secured a guaranteed source of raw product. Pro-Fac and Curtice Burns operated under a series of four agreements, later consolidated and called the "Integrated Agreement." As a cooperative, Pro-Fac was able to provide lower cost financing to help the company grow. The two organizations shared equally in profits and losses.
The companies prospered and grew. Soon the original "vision" grew as well. In its early years, Curtice Burns produced mostly private label products. But it soon began to diversify, both geographically and through the introduction of new product lines. The company balanced the more volatile commodity-based goods with other product lines. No longer were all products sourced through Pro-Fac.
Pro-Fac's retained earnings and preferred stock was tradable and had an active market. Then, in the early 1970s, Curtice Burns became a public company, adding shareholders to the ownership mix.
In 1993, Curtice Burns began a restructuring program, divesting unprofitable or non-strategic businesses. Agway by then owned one-third of Curtice Burns and had a controlling interest in the board. Agway, too, was going through a restructuring when, in 1993, it announced that it was getting out of the food business and was selling its share of Curtice Burns. Eventually the entire company was put up for sale.
Bidding for Curtice Burns
The board and most members of ProFac considered the future of Curtice Burns to be critical to the success of their farms because it was the marketing outlet for much of what they grew. SO, with the full support of its members, Pro Fac management and the board aggressively pursued the purchase of Curtice Burns. This would be the only way to assure markets for its members and to continue to share in earnings, the board felt.
Pro-Fac began working with legal firms and an investment banker as it pursued the acquisition. However, relationships between Curtice Burns and Pro-Fac deteriorated because some directors and managers at Curtice Burns felt stockholders would receive more if Dean Foods was the successful bidder. Interpretation of the Integrated Agreement became the subject of many legal battles.
Offers for Curtice Burns started coming in, and the due diligence process began. Curtice Burns' board and Agway management reviewed all proposals, analyzing the impact of each offer on the company's various divisions, employees and, most of all, public shareholders. Advisors for each party had wide differences of opinion on the best value for the stock. Pro-Fac's offer of $17 per share was far below Curtice Burns'estimated value of $25 to $35 per share.
In June 1994, Curtice Burns accepted a bid from Dean Foods, a publicly held company in Franklin Park, Ill., for a maximum of $20 per share, rejecting the $17 per-share bid from Pro-Fac. However, Dean Food's offer was contingent upon Curtice Burns resolving a number of issues, the biggest of which was terminating its agreement and settling any differences with Pro-Fac.
Pro-Fac stood firm. Its position was
that it also had other claims against Curtice Burns which were worth even
more than the $3-per-share difference between Dean's offer and its own.
Lawyers battled it out. Dean Foods waited.
Members Come Through
In August 1994, Pro-Fac raised its bid to $19 per share, with no contingencies. Dean Foods made it clear that it would not go higher. Pro-Fac's $19 now looked good, especially with the co-op's other claims against Curtice Burns of over $5 per share.
Curtice Burns and Agway accepted ProFac's offer on three conditions: 1.) Pro-Fac members would have to approve the offer; 2.) That the cooperative obtain financing commitments; and 3.) That 90 percent of Curtice Burns stock be tendered. Pro-Fac began a series of "town meetings" during which management and board members personally visited members and answered their concerns. On Aug. 31, 1994, Pro-Fac members voted overwhelmingly in favor of the merger.
Financing for the merger came from three main sources: $130 million of ProFac member equity; a $260 million loan from CoBank and $160 million in high yield, subordinated bonds to be sold by ProFac's investment banker. The tender offer was mailed to shareholders.
Pro-Fac then had to sell the bonds. Once again, management took to the road, meeting with key investor groups around the country. The 'road shows' were so successful that they were terminated before scheduled completion. The bonds were over-subscribed by nearly 100 percent.
Members agreed, shareholders voted
and the bonds were sold. Pro-Fac had fulfilled all three conditions of
the offer and, on Nov. 3, 1994, the final papers were signed, making Pro-Fac
the owner of Curtice Burns Foods.
Pro-Fac members stood firm throughout this arduous process. The co op had the backing of the entire membership, even those not economically dependent on the cooperative.
Two Board System
Pro-Fac and Curtice Burns still operate under two separate boards. Curtice Burns runs the marketing and processing business, while Pro-Fac tends to agricultural issues.
The solid support of members does not mean that they were not concerned about the large debt load the cooperative assumed to acquire Curtice Burns-far from it, Mullen notes. But in recent months, they have been encouraged by the steps taken to help reduce debt.
Fiscal 1996 was a difficult year for Curtice Burns. After sharing its losses with Pro-Fac, Curtice Burns reported a net loss of $11.9 million for the year ending in June 1996. Consequently, members only received a crop payment of 90 percent of commercial market value (CMV). (The cooperative has various commodity committees which calculate CMV for their members based on average industry prices.) Historically, Pro-Fac has always paid members more than CMV. Members were very clear in letting management know that they did not want to settle for less than 100 percent of CMV again.
In fiscal 1997, Curtice Burns started implementing its new strategic plan, launching a rapid pace of restructuring initiatives. In addition to the sale of certain non-strategic assets, the company's three main business units were consolidated and it began out-sourcing for some of its warehousing and transportation needs. As a result, growers were paid 107 percent of CMV in 1997 and received their final crop payment two weeks earlier than in 1996.
In addition to reducing debt, new initiatives offer expanded opportunities for Pro-Fac markets. For example, when Curtice Burns sold its canned vegetable business to Seneca Foods (in order to focus on frozen vegetables-a key strategic initiative), the agricultural departments for both organizations were combined and are now managed by Curtice Burns.
"It was hard to give up the canned vegetables," Pro-Fac President Fox recently told the Rochester Business Journal. "It was the first crop (group) sold after ProFac formed. But Mullen was still able to keep the market while reducing the debt. Without him, I don't think we could have come up with this idea."
Under this arrangement, Pro-Fac members now have the opportunity to supply Seneca Foods. A similar alliance was forged through a joint venture with Flanagan Foods, creating a new sauerkraut company, Great Lakes Kraut Co. This too provides additional opportunities for Pro-Fac growers to expand their markets.
As a result of these restructuring efforts, Curtice Burns has reduced debt by nearly $100 million in fiscal 1997.
Pro-Fac has been on the leading edge of the food industry in many areas, including the expansion of markets for members' preferred stock. Under this system, after five years member retains convert to preferred stock. Through this dividend-bearing preferred stock, members can sell their equity to other investors without taking it out of the cooperative. It is an ideal vehicle for a cooperative because it can be issued without giving up any member control.
Prior to the acquisition, Pro-Fac had an informal market of three brokers who traded the stock, but that market disappeared during the change-of-control. To expand that market, the co-op pursued a listing on the Nasdaq stock exchange. About 92 percent of Pro-Fac members exchanged their existing preferred stock for the new preferred stock-2.8 million shares. Nasdaq trading began on Oct. 11, 1995, under the symbol: PFACP. This marked another milestone for Pro-Fac: the first time a cooperative was listed on a stock exchange.
The evolving relationship of Pro Fac to Curtice Burns-first as partners, then as owners-continues to provide opportunities for innovative ways to add value for members, Mullen and Fox agree. They say the immediate challenge is to prove that the positive results for the past year will be repeated. "We know that there will be some bumps in the road, but for the last 10 months, it's been kind of a joy ride from being able to implement the strategy. Everything has worked perfectly," Mullen says.
"The most challenging part is yet to
come. Growth is more challenging than the fixing we have done. This industry
(processed fruits and vegetables) is not growing...but we need to continue
to grow our markets nevertheless."
Just before press deadline for this magazine, two major name changes were announced affecting Curtice Burns Foods Inc. and its major subsidiaries. Curtice Burns will now be known as "Agrilink Foods Inc.," while three of its recently consolidation business units-Comstock Michigan Fruit, Southern Frozen Foods and Brooks Foods-will assume the "Curtice Burns Foods" name and will operate as the major subsidiary of Agrilink Foods.
No name changes are being made in the brand name or product lines. However, all Agrilink business units-including Curtice Burns Foods, Nalley's Fine Foods, Tim's Cascade Chips, Snyder of Berlin and Husman Snack Foods-will now carry the tag line "an Agrilink business" in their logos.
"We are very excited about both name changes," says Dennis M. Mullen, president and chief executive officer of Aglilink Foods, "and how well they represent who we are: an agriculturally based processing and marketing company owned by an agricultural cooperative. The name makes perfect sense for us. 'Agri'is what we are: the vast majority of our products are agriculturally based. 'Link" has many connotations: we link to Pro-Cooperative, we link to customers, and our business units link to one another."
This material has been reproduced in electronic format with the permission of Rural Cooperatives.