Wynnefield Announces Opposition to Proposed Cagle's Buy-Out
Monday December 24, 8:00 am ET NEW YORK--(BUSINESS WIRE)--The Wynnefield Group, a long-term stockholder in Cagle’s Inc. (Amex: CGLA - News) that currently holds approximately 4.7% of the Company’s outstanding shares of common stock, today issued the following letter, which it has mailed to the Cagle’s Special Committee of Independent Directors: December 21, 2007
VIA FEDEX
The Special Committee of Independent Directors
c/o Panos J. Kanes
Cagle's Inc.
2000 Hills Avenue NW
Atlanta, GA 30318
Dear Members of the Special Committee:
Wynnefield Partners Small Cap Value, LP, Wynnefield Partners Small Cap Value, LP I, and Wynnefield Small Cap Value Offshore Fund, Ltd (collectively “Wynnefield”) own 217,400 (or approximately 4.7%) of the outstanding common shares of Cagle’s Inc. (Amex-CGLA). We are long-term holders of the shares, having invested in the Company for more than six years.
We are writing to express our opposition to the proposed acquisition of the Company for $9.00 per share by James Douglas Cagle, George Douglas Cagle, James Douglas Cagle, and the Cagle Family Holdings LLC, and to request that the Special Committee fulfill its fiduciary duties to act in the best interest of the Company’s minority shareholders by rejecting this proposal.
The proposal is inadequate for three primary reasons:
1. It does not reflect the true intrinsic value of the Company;
2. It does not recognize the substantial value of the Company's just-completed debt reduction program - a program whose costs were borne by shareholders and whose benefits would be seized by the Cagle family; and
3. It does not reflect the full long-term value of the Company, as evidenced by industry fundamentals.
Proposed Price Substantially Undervalues Company
Measured by price-to-book value, the proposed price substantially undervalues the Company.
For example, the book value of the Company was $48,081,000, as of September 29th, 2007. With 4,664,000 shares outstanding, this translates to a book value of $10.30 per share. Thus, the Cagle family proposal represents price-to-book value of only 0.87x . By way of comparison, the Pilgrim’s Pride purchase of Gold Kist provided those shareholders with 2.2x book value.
Cagle Family Seeks to Seize Benefits of Debt Reduction Paid by Shareholders.
Over the last five years, the company has done an excellent job in reducing net debt as indicated below:
2003: $85.37 million in net debt at year-end
2004: $37.46 million
2005: $29.13 million
2006: $28.44 million
2007: $18.57 million
As of September 29, 2007, the Company had $11.19 million in net debt.
While we applaud the company’s debt reduction efforts, we are troubled by the timing of the proposed going-private transaction as the Cagle family would reap substantial benefits of acquiring a company with significantly lower debt levels – an achievement gained at shareholders’ expense. Shareholders who bore these costs for several years should receive commensurate benefits. The proposal would, instead, largely reward the Cagle family.
Industry Fundamentals:
The current valuation of chicken industry stocks appears to be overly pessimistic, even recognizing the recent pullback in breast prices. Today, industry gross profits per pound at the commodity operator level are only 2-3c below the 5-year average gross profit per pound, and remain well above break-even, with historical troughs of -3c/pound. Additionally, prices for chicken breasts and legs have remained stable in November.
In past earnings press releases, Cagle’s management has commented on high feed prices, but in fact these might be helping – rather than harming – the company’s profitability. For example, higher corn prices have actually supported higher chicken export prices, even as those corn prices pushed up domestic chicken prices in Russia and in China – making Cagle’s exports even more price-competitive in those important markets. While leg quarter prices are down to 42c from historic highs this summer, they remain well above the 5-year average price of 30c.
In conclusion, even though there may be short-term challenges to the Company and the industry, we believe in the long-term prospects of Cagle’s as a public company.
Selling this company on the cheap to inside shareholders is an unacceptable outcome. As fiduciaries to our own investors, we can not support selling our shares to the Cagle family for such an inadequate price. We will vote all of our shares against the transaction should the Special Committee of independent directors approve this proposal. We urge the Board not to support this transaction at the proposed price and to seek an effective means to enhance value for the Company’s outside shareholders.
Sincerely,
Nelson Obus
President
Wynnefield Capital, Inc.
ABOUT THE WYNNEFIELD GROUP:
The Wynnefield Group is a long-term investor in Cagle’s, having first invested in the company about six years ago. The Wynnefield Group includes several affiliates of Wynnefield Capital, Inc. (WCI), a value investor specializing in U.S. small cap situations that have company- or industry-specific catalysts. WCI was established in 1992. Its founding partners, Nelson Obus and Joshua Landes, held senior research and institutional equity positions at Lazard Freres & Co. during the 1980s, and the initial Wynnefield investors included many of their colleagues at Lazard. The fund has grown to approximately $450 million under management. Nelson Obus currently serves on the board of directors of Layne Christensen Company (NASDAQ: LAYN - News), serving on its audit committee and compensation committee.
Contact:
Kekst and Company
Eric Berman, 212-521-4894
AI
