Mexican Chicken King Seeking Deals North of the Border

Industrias Bachoco SAB de CV, Mexico’s biggest chicken producer, is scouring for U.S. acquisitions to gain a bigger share of the world’s largest poultry market.

While the Celaya, Mexico-based company has 35 percent of the Latin American nation’s poultry market, it has just 2 percent in the U.S. after buying OK Industries Inc. in 2011, Chief Financial Officer Daniel Salazar Ferrer said. Bachoco wants to be among the top 15 U.S. producers within three years.

“We are in search of and hoping for alternatives for increasing our participation in the U.S.,” he said in an e-mailed response to questions. “We have to increase our critical mass to have a better competitive position.”

Bachoco joins Tyson Foods Inc. and JBS SA’s North American poultry unit Pilgrim’s Pride Corp. in seeking a greater share of North America’s food market. The Mexican company is among just eight of the 50 members of the BI North America Food Manufacturing Valuation Peers Index that generate more cash than debt as rising chicken prices and a 33 percent decline in global corn prices in the past year boost earnings.

Shares of Bachoco fell 0.7 percent to 56.64 pesos at 1:14 p.m. in Mexico City. The stock is up 28 percent this year and 13 percent in the past month, almost double the average gain among global peers tracked by Bloomberg. Tyson has fallen 8.7 percent in the past month, while Pilgrim’s Pride is down 1.6 percent.

M&A Pipeline

The rally has taken Bachoco’s market value to $2.62 billion. Of the four U.S. poultry companies tracked by Bloomberg, only Sanderson Farms Inc. and Cal-Maine Foods Inc. are less valuable at $2.19 billion and $1.74 billion, respectively. Bachoco has the third best ratio of net debt to earnings before interest, taxes, depreciation and amortization among North American peers with negative 1.38, compared with the average ratio of positive 2.09.

“The company has strong fundamentals for continued growth and, as protein consumption increases in Mexico, Bachoco will be one of the chief beneficiaries,” Miguel Mayorga, a Latin America food manufacturer equity analyst at Corporativo GBM, said by phone from Mexico City. “Without question there are mergers and acquisitions in the pipeline for the company.”

Mayorga has the equivalent of a buy rating on the stock and a target price of 60.30 pesos.

Corporate Governance

Bachoco has made three acquisitions in Latin America and two in North American since 1999, according to data compiled by Bloomberg. Morgan Stanley advised the company in the purchase of Grupo Campsi SA. Tyson’s bid for Hillshire Brands Co. is one of five U.S. poultry deals to be announced in the past 12 months.

The company held its first-ever conference call with investors following first-quarter results in February as part of a strategy to improve communication.

The stock has also been boosted by an increase in trading volume after the free float was lifted to 26.75 percent from 17.25 percent, according to Alberto Carrillo, a senior analyst at Signum Research.

“The corporate governance has improved and has really strengthened the company,” Carrillo said by telephone from Mexico City. “They have been much more transparent and providing investors with more information about the company.”

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