Serving Member Needs in Changing Markets: the Case of Pro-Fac Cooperative 11 th Annual Farmer Cooperatives Conference Research on Structure, Strategy, and Finance November 18, 2008 in St. Paul, MN Brian M. Henehan and Todd M. Schmit bmh 5@cornell. edu Dept of Applied Economics and Management Cornell University Cornell Cooperative Enterprise Program 1
Acknowledgements Co-author, Dr. Todd Schmit, Asst. Professor, AEM, Cornell University v Gail Malone, graduate student in AEM, Cornell University v Jenna Van. Lieshout, undergraduate student in AEM, Cornell University v Kevin Mc. Avey, graduate student, AEM, Cornell University v Steve Wright, General Mgr. Pro-Fac Cooperative v Kevin Murphy, Member Relations, Pro-Fac Cooperative v Cornell Cooperative Enterprise Program 2
Cornell Cooperative Enterprise Program v Long standing relations with Ag. Cooperatives in region and U. S. v Lecture in undergraduate courses and collaborate with graduate students v Conduct applied research v Deliver extension and outreach program v Coordinate with the NE Cooperative Council, (NECC) www. cooperatives. aem. cornell. edu Cornell Cooperative Enterprise Program 3
Why Study Pro-Fac Cooperative? v Original Formation Based on Highly Innovative Business Structure v Pro-Fac Has Effectively “Re-Designed” Itself Throughout It’s History v Useful Case for Understanding How A Cooperative Strategically Re-positioned During Times of Significant Change v Case Includes Review of Structure, Strategy and Finance Dimensions Cornell Cooperative Enterprise Program 4
Speakers from Previous Farmer Cooperative Conferences v CB, v PF CFO General Manager v Agrilink, CEO Cornell Cooperative Enterprise Program 5
Pro-Fac Cooperative is an agricultural marketing cooperative of 488 members who provide fruits, vegetables and popcorn for processing facilities across the country. These commodities are marketed as branded, private label and food service products, primarily through its main customers, Birds Eye Foods and Allens, Inc. The total value of crops delivered in 2007 was $61. 1 million. Cornell Cooperative Enterprise Program 6
Map of Pro-Fac Member Crops Source: PF web site – www. profaccoop. com Cornell Cooperative Enterprise Program 7
Pro-Fac Member Crops by State v v v v v California: Peaches Delaware: Limas, Peas Florida: Potatoes Illinois: Popcorn Michigan: Apples, Asparagus, Blueberries, Carrots, Dry Beans, Peaches, Potatoes, Tart Cherries Nebraska: Popcorn New York: Apples, Beets, Butternut Squash, Carrots, Corn, Kraut Cabbage, Peaches, Peas, Red Cabbage, Snap Beans, Tart Cherries Oregon: Cucumbers, Potatoes Pennsylvania: Potatoes Washington: Cucumbers, Dry Beans, Potatoes Cornell Cooperative Enterprise Program 8
Presentation Will Focus on Three Periods of Transformation v Discuss Why the Transformations Took Place v Present Strategies and Structures Utilized for Redesign During Each Phase v Review Financing Approaches v Welcome Kevin Murphy from Pro-Fac v Provide a Member-Relations Perspective v Allow time for Discussion Cornell Cooperative Enterprise Program 9
Three Phases of Redesign 1. 2. 3. First Phase starts with the Formation of the Cooperative in 1961 and runs to 1994 Second Phase Starts with Acquisition of Curtice-Burns Operations in 1994 and ends in 2002 Third Phase Begins with Inclusion of Vestar Capital, an Equity Partner Who Becomes Majority Owner of Processing and Marketing Assets in 2002 to today Cornell Cooperative Enterprise Program 10
Phase 1. v PF Formed to Help Salvage Fruit and Vegetable Processing in New York v This Period Saw Dramatic Restructuring in the Industry in U. S. and NY v Post WWII Saw Dramatic Decline in Number of Firms and Plants v Two Such Firms Located in W. New York – Curtice Brothers and the Burns-Alton Corp. Came up for Sale Cornell Cooperative Enterprise Program bmh 5@cornell. edu 11
GLF Steps In v The Grange League Federation, GLF (later became Agway) was the major supply cooperative operating in the Northeast in the 1960’s v Producer concern over the future of the Fruit and Vegetable Processing Industry in New York State v GLF had seen the negative impact of the loss of processing firms on it’s members as well as on it’s supply and input sales Cornell Cooperative Enterprise Program 12
GLF/Agway as a Catalyst GLF Acted as a Catalyst to Effect the Merger of two family canning business to form Curtice. Burns, (CB) v Concurrently Helped to Form and Capitalize Pro-Fac Cooperative, (PF) v Pro-Fac is a Contraction of the terms “Producers” and “Facilities” v GLF (and later Agway) Assisted in Developing, Financing, and Managing the Joint Venture Between CB and PF v Cornell Cooperative Enterprise Program 13
Having Observed Fruit and Vegetable Cooperative Failures v The Founders of Pro-Fac Observed a Number of Pitfalls that Failed Cooperatives Encountered: • Being under-capitalized • Carrying the expense of an over supply of raw product in inventory • Inexperienced management that did not understand the market for member products • Marketing single crops and a lack of product diversification • Not allowing professional management to operate at arms length in daily operations • Lack of diverse sources of capital • Inability to turn around unprofitable operations lacking a strong marketing focus Cornell Cooperative Enterprise Program 14
Phase 1. Integrated Operations – PF & CB Member Farm Food Service Member Farm Ag. Crop Coordination Services & Harvest Member Farm Food Crop Delivery Manufacturing Branded Products Sales & Marketing Distribution Retail Production Planning ----- F a r m P r o d u c t V a l u e C h a i n ----- Specialty Products CB Functions PF Functions Cornell Cooperative Enterprise Program 15
Summary of Curtice Burns and Pro-Fac Cooperative Integrated Agreement, 1961 -1994 Curtice Burns -Net proceeds derived from total sales; shared with PF 50/50 -Common stock listed on AMEX, 1973 -Conducted all marketing activities -Owned brands, made acquisitions -Developed new products -Supervised and managed business and properties of PF -Maintained relations with lenders, kept books for joint venture -One PF director on CB board -Payment for crops based on CMV -As CB operations expanded, PF given first right to supply new plants -Developed sales plan that determined volume produced for each commodity Cornell Cooperative Enterprise Program Area Pro-Fac Cooperative Finance -Financed ownership of plants, leased facilities to CB -Equity loaned to CB; seasonal & term loans from Bank for Coop’s -Sold delivery rights based on common stock to members Marketing -Recruited members from new acquisition farming areas -Reserved first right to purchase brands upon dissolution -Farm products provide basis for new products Management & Governance Supply Agreement -PF and Agway had access to books and financial information -1 CB and 1 Agway director on PF board -Committee for each commodity -Committees determine CMV in concert with PF management and approve crop agreements -Payments made from a single, multi-commodity pool 16
Pro-Fac Cooperative, GLF/Agway, and Curtice Burns Organization and Integrated Agreement, 1961 – 1994. GLF/Agway Farmer-Members Elect Directors Pro-Fac Grower-Members Elect Directors GLF/ Agway Inc. Board of Directors Pro-Fac Cooperative (PF) Board of Directors Controlling interest in CB Appoints CB Board Agway Rep. on Board CB Rep. on Board Curtice Burns (CB) Board of Directors PF Rep. on Board Curtice Burns (CB) Management & Staff Pro-Fac Cooperative (PF) Management & Staff Integrated Agreement: 1. Finance 2. Management 3. Marketing 4. Supply Cornell Cooperative Enterprise Program 17
Phase 2. Begins in 1992 v Agway, Holding Majority Ownership, is Forced to Sell It’s CB Interest to Raise Cash v The Long Standing Integrated Agreement Venture with CB Came to an End in 1994 as PF Purchases Agway’s Interest v Created Initial Leverage on PF’s Balance Sheet Cornell Cooperative Enterprise Program 18
Phase 2. Vertically Integrated Operations – Pro-Fac & Agrilink Foods Member Farm Food Service Member Farm Ag. Crop Coordination Services & Harvest Member Farm Food Crop Delivery Manufacturing Branded Products Sales & Marketing Distribution Retail Production Planning ----- F a r m P r o d u c t V a l u e C h a i n ----- Specialty Products Pro-Fac/Agrilink Functions Cornell Cooperative Enterprise Program 19
Phase 2. Developments v PF Becomes the First Farmer Cooperative to Acquire a Publicly Traded Company v Later Becomes the First Farmer Cooperative with a Security (cumulative preferred stock) Listed on a Major Exchange – NASDAQ (symbol PFACP) v To Signify It’s Role in Linking the Agricultural and Marketing Segments, CB Changed It’s Name to Agrilink Cornell Cooperative Enterprise Program 20
Pro-Fac Cooperative, Curtice Burns/Agrilink/Birdseye Foods Organization, 1994 -2002. Grower-Members Elect Directors Pro-Fac Cooperative (PF) Board of Directors 12 - Elected by Membership 3 - Independent, appointed by elected directors Pro-Fac Cooperative Management & Staff Curtice Burns / Agrilink / Birds Eye (CB/AL/BE) Board of Directors 15 – Appointed by PF Board Curtice Burns / Agrilink / Birds Eye Management & Staff Notables: • CB/AF/BE wholly-owned subsidiary of PF (1994) • Pro-Fac Board & CB/AL/BE Board meet jointly as a single board, separate votes as necessary • CB changes name to Agrilink Foods (1997) & to Birds Eye Foods (2003) • Agrilink controlled brands, including acquisition of Birdseye & other brands from Dean Foods Vegetable Co. (1998) • Dean’s acquisition effectively doubles size of Birds Eye Foods • Birds Eye Foods finds itself in a highly leveraged position Cornell Cooperative Enterprise Program 21
Phase 3. Begins in 2002 v Agrilink is in a Highly Leveraged Position v Thin Margins Limit Earnings v Capacity of Members to Provide Needed Equity is Being Tested v Board Explores Other Sources and Reviews Many Options v Accepts Proposal from Vestar Capital Partners and Approved by Member Vote Cornell Cooperative Enterprise Program 22
Number of Pro-Fac Members, 1974 2008 Cornell Cooperative Enterprise Program 23
Pro-Fac shareholder and member capitalization and investment, 1974 -2008. Cornell Cooperative Enterprise Program 24
Commercial market value (CMV) of raw product deliveries, total and per member, 1962 -2008 Cornell Cooperative Enterprise Program 25
Pro-Fac debt levels and debt ratio, 1974 - 2008 Cornell Cooperative Enterprise Program 26
Phase 3. Vestar, PF, and Allens Operations Member Farm Private Label Products Member Farm Ag. Crop Coordination Services & Harvest Member Farm Crop Delivery Allen’s Food Manufacturing Bird’s Eye Brand Products Food Service Sales & Marketing Distribution Retail Supply agreements ----- F a r m P r o d u c t V a l u e Allens Foods Functions Birds Eye Foods Functions Vestar Majority Owner of BEF C h a i n ----- Specialty Products PF & Farm Fresh First, LLC Functions Minority Share of BEF Cornell Cooperative Enterprise Program 27
Pro-Fac Cooperative, Vestar, & Birds Eye Foods Organization, 2008 Grower-Members Elect Directors Vestar Capital Partners Private Equity Firm Vestar LLC Capital Investment - 56% Pro-Fac Cooperative (PF) – 41% Board of Directors Management - 3% Birds Eye Holdings LLC Board of Directors 12 - Elected by Membership 3 - Independent, appointed by elected directors 9 – Vestar 2 – Appointed by PF board Pro-Fac Cooperative Management & Staff Birds Eye Foods, Inc. Management & Staff Notables: • Vestar holds controlling interest in Birds Eye Holdings LLC • Birds Eye Holdings owns facilities (assets) and Birds Eye brands • Allens Inc. purchased NY plant facilities and private label brands in 2006 • PF received $120 million distribution from Birds Eye Holdings in 2007, used primarily for equity redemption and dividend payments Cornell Cooperative Enterprise Program 28
Phase 3. Developments In August 2002, Vestar Becomes Majority Owner of Agrilink (approx. 56%) v Agrilink Name Changed to Birds Eye Foods, BEF v PF: v • Maintains significant minority ownership of BEF (approx. 40%) with management accounting for (approx. 4%) • Has 10 year supply agreement • Receives $10 million annually for 5 years • Can secure $1 million line of credit for each of 5 years Cornell Cooperative Enterprise Program 29
Phase 3. Developments v Bird Eye Foods Rolls Out Successful New Products v Vestar Sells Processing Plants and Private Label Business to Allens, Inc. in 2006 v Vestar Subsidiary- BEF Holdings Distributes 120 Million to PF v PF Uses Distribution to Redeem Equity and Pay Dividends on Selected Cornell. Securities Cooperative Enterprise Program Cornell Cooperative Enterprise Program 30
Management and Governance for Each Phase v Phase I. v v v Phase III. v v Integrated Agreement Includes Management Interlocking Boards of Directors Create Board for Subsidiary and Meet Jointly Manage All Phases of Operations Board Representation on Holding Company Board PF Manages Supply and Procurement Operations Only Cornell Cooperative Enterprise Program 31
Information and Knowledge for Each Phase v Phase I. v v v Phase III. v v Valuable feedback from processing and marketing arm of CB Interlocking Boards of Directors Exchange valuable knowledge PF & Subsidiary Boards Meet Jointly Strong Market Signals Transmitted Back to PF from Birdseye Foods Board Representation on Holding Company Board – BEF, LLC Limited Access to Market Info. from Privately Held Firms Cornell Cooperative Enterprise Program 32
Strategy, Financing, & Structure Across Phase Strategy Financing Structure 1 Buy Plants & Integrate Operations with Marketing Firm *Member Equity *Diversity of Sources *Tap into Pubic Markets Joint Venture with Integrated Operations 2 Vertical Integration *Maximize Level of Acquired JV Firm and Member Equity Major National Firm as *Debt Used for Leveraged Subsidiary Buyout 3 Interact with Private Equity Firm *Continue Access to Public Markets *Raise Capital from Private Equity Firm Cornell Cooperative Enterprise Program *Act as Preferred Supplier *Assume Minority Position in Holding Co. 33
Summary v The PF story present a unique case in the world of cooperatives v A Number of “Firsts” for a farmer cooperative: • leveraged buyout of publicly traded company, • having a security listed on a major exchange v Continue to Change and Adapt to New Players and Markets Cornell Cooperative Enterprise Program 34
Summary, cont’d v Utilized a number of innovative strategies to overcome potential constraints encountered by traditional agricultural cooperatives: • • • Transferable delivery rights Multi-commodity pool Diverse set of crops and products Board geographic membership base Conversion of equity to publicly traded securities to create liquidity for member investment • Partnering with successful firms and capital groups Cornell Cooperative Enterprise Program 35
Current Situation for Most Members v Significant Increase in Prices for Most Crops (Input costs also increasing) v Growing Demand Results in Increased Acreage for Most Crops v $120 M Distribution in 2007 Generated Higher ROE v Situation Varies Across Crops and Regions v It Remains to Be Seen, How Long It will Last Cornell Cooperative Enterprise Program 36
Relationships with CB, AF, BEF & Communication Across Phase Relationship Understanding of Investment Information Provided 1 OK Poor A Lot 2 Better Poor Some, Not As Timely 3 Minimal Good Some, Not As Timely Cornell Cooperative Enterprise Program 37
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