AFA Foods Files Bankruptcy Citing ‘Pink Slime’ Coverage

AFA Foods, a ground-beef processor owned by Yucaipa Cos., sought bankruptcy court protection with a plan to sell some assets after media coverage of “pink slime” cut demand for its products.

The company, based in King of Prussia, Pennsylvania, listed assets of $219 million and debt of $197 million in Chapter 11 papers filed today in U.S. Bankruptcy Court in Wilmington, Delaware.

Celebrity chef Jamie Oliver is among food activists who have criticized the use of what they dubbed “pink slime,” a filler produced by treating finely ground beef scraps with ammonia hydroxide to kill pathogens. Beef Products Inc. last week temporarily suspended production at three plants because of consumer concerns. U.S. Agriculture Secretary Tom Vilsack said March 28 that the product, referred to in the industry as lean, finely textured beef, is safe to eat.

“Ongoing media attention has called into question the wholesomeness” of the meat, and has “dramatically reduced the demand for all ground beef products,” AFA interim Chief Executive Officer Ron Allen said in court papers.

Ground beef demand will soften in the next several months as consumers shift to meat that doesn’t contain the lean, finely textured beef, said Ann Gurkin, an analyst for Davenport & Co. Last month, the USDA said schools in the government’s lunch program can order ground beef without the product following public pressure to remove it from cafeterias.

Fast-Food Chains

Several fast-food restaurant chains stopped using the lean beef, including McDonald’s Corp., the world’s largest restaurant chain, Burger King Holdings Inc. and Yum! Brands Inc.’s Taco Bell. Tyson Foods Inc., the biggest U.S. beef processor after Cargill Inc., said March 27 it is making “adjustments to accommodate our customers that no longer want” the product added to their ground beef.

Reduced use of the product will further tighten beef supplies, said Gurkin, a Richmond, Virginia-based analyst who has a “buy” rating on Tyson. U.S. beef production will drop 4.4 percent in 2012 from a year earlier, the USDA forecast March 9.

Given the issue has only come up in the past few weeks, the effect on Tyson’s sales and earnings is unclear, Gurkin said. She said she is “monitoring” it because demand usually rises with the approaching summer grilling season in the U.S.

Among AFA’s largest unsecured creditors listed in court papers are meat suppliers Orleans International Inc., owed $8.3 million, and Tyson Fresh Meats, owed $3.27 million.

Cargill Cut

“We’re in the process of seeking more information about AFA’s plans,” Gary Mickelson, a spokesman for Springdale, Arkansas-based Tyson, said in an e-mail.“The sale of beef trimmings is just a part of each of our beef processing plants’ production and we do not expect this issue to result in a plant closing.”

While Minneapolis-based Cargill has scaled back production of finely textured beef at the four plants where it is produced, “no facility closures or worker reductions are contemplated,” Mike Martin, a Cargill spokesman, said in an e-mail today.

AFA “continues discussions with potential buyers to secure the highest and best outcome for its business,” officials said in a statement. Los Angeles-based Yucaipa, which owns AFA Foods parent AFA Investment Inc., is run by billionaire Ron Burkle.

AFA has about 850 full-time employees and annual revenue of $958 million, according to the statement. The company obtained a $56 million credit line from GE Capital and Bank of America Corp. to carry it through the bankruptcy process.

The case is In re AFA Investment Inc., 12-11127, U.S. Bankruptcy Court, District of Delaware (Wilmington).