Brian M. Henehan and Todd M. Schmit bmh5@cornell Dept of Applied Economics and Management

Cornell Cooperative Enterprise Program 1Cornell Cooperative Enterprise ProgramCornell Cooperative Enterprise Program

Serving Member Needs in Changing Serving Member Needs in Changing Markets: the Case of Pro-Fac Markets: the Case of Pro-Fac

CooperativeCooperative1111thth Annual Farmer Cooperatives Conference Annual Farmer Cooperatives ConferenceResearch on Structure, Strategy, and FinanceResearch on Structure, Strategy, and Finance

November 18, 2008 in St. Paul, MNNovember 18, 2008 in St. Paul, MN

Brian M. Henehan and Todd M. SchmitBrian M. Henehan and Todd M. [email protected]@cornell.edu

Dept of Applied Economics and ManagementDept of Applied Economics and Management Cornell UniversityCornell University


AcknowledgementsAcknowledgements Co-author, Dr. Todd Schmit, Asst. Professor, Co-author, Dr. Todd Schmit, Asst. Professor,

AEM, Cornell UniversityAEM, Cornell University Gail Malone, graduate student in AEM, Cornell Gail Malone, graduate student in AEM, Cornell

UniversityUniversity Jenna VanLieshout, undergraduate student in Jenna VanLieshout, undergraduate student in

AEM, Cornell UniversityAEM, Cornell University Kevin McAvey, graduate student, AEM, Cornell Kevin McAvey, graduate student, AEM, Cornell

UniversityUniversity Steve Wright, General Mgr. Pro-Fac Steve Wright, General Mgr. Pro-Fac

CooperativeCooperative Kevin Murphy, Member Relations, Pro-Fac Kevin Murphy, Member Relations, Pro-Fac

CooperativeCooperative


Cornell Cooperative Enterprise Cornell Cooperative Enterprise ProgramProgram

Long standing relations with Ag. Long standing relations with Ag. Cooperatives in region and U.S.Cooperatives in region and U.S.

Lecture in undergraduate courses and Lecture in undergraduate courses and collaborate with graduate studentscollaborate with graduate students

Conduct applied researchConduct applied research Deliver extension and outreach programDeliver extension and outreach program Coordinate with the NE Cooperative Coordinate with the NE Cooperative

Council, (NECC) Council, (NECC) www.cooperatives.aem.cornell.edu


Why Study Pro-Fac Cooperative?Why Study Pro-Fac Cooperative? Original Formation Based on Highly Original Formation Based on Highly

Innovative Business StructureInnovative Business Structure Pro-Fac Has Effectively “Re-Designed” Pro-Fac Has Effectively “Re-Designed”

Itself Throughout It’s HistoryItself Throughout It’s History Useful Case for Understanding How A Useful Case for Understanding How A

Cooperative Strategically Re-positioned Cooperative Strategically Re-positioned During Times of Significant ChangeDuring Times of Significant Change

Case Includes Review of Structure, Case Includes Review of Structure, Strategy and Finance DimensionsStrategy and Finance Dimensions


Speakers from Previous Farmer Speakers from Previous Farmer Cooperative ConferencesCooperative Conferences

CB, CFOCB, CFO

PF General ManagerPF General Manager

Agrilink, CEOAgrilink, CEO


Pro-Fac CooperativePro-Fac Cooperative

Pro-Fac Cooperative is an agricultural marketing Pro-Fac Cooperative is an agricultural marketing cooperative of 488 members who provide fruits, cooperative of 488 members who provide fruits, vegetables and popcorn for processing facilities vegetables and popcorn for processing facilities across the country. These commodities are across the country. These commodities are marketed as branded, private label and food marketed as branded, private label and food service products, primarily through its main service products, primarily through its main customers, Birds Eye Foods and Allens, Inc. customers, Birds Eye Foods and Allens, Inc. The total value of crops delivered in 2007 was The total value of crops delivered in 2007 was $61.1 million.$61.1 million.


Map of Pro-Fac Member Crops Map of Pro-Fac Member Crops

Source: PF web site – www.profaccoop.com


Pro-Fac Member Crops by StatePro-Fac Member Crops by State California: California: PeachesPeaches Delaware: Delaware: Limas, PeasLimas, Peas Florida: Florida: PotatoesPotatoes Illinois: Illinois: PopcornPopcorn Michigan: Michigan: Apples, Asparagus, Blueberries, Carrots, Dry Beans, Apples, Asparagus, Blueberries, Carrots, Dry Beans,

Peaches, Potatoes, Tart CherriesPeaches, Potatoes, Tart Cherries Nebraska: Nebraska: PopcornPopcorn New York: New York: Apples, Beets, Butternut Squash, Carrots, Corn, Kraut Apples, Beets, Butternut Squash, Carrots, Corn, Kraut

Cabbage, Peaches, Peas, Red Cabbage, Snap Beans, Tart Cabbage, Peaches, Peas, Red Cabbage, Snap Beans, Tart CherriesCherries

Oregon: Oregon: Cucumbers, PotatoesCucumbers, Potatoes Pennsylvania: Pennsylvania: PotatoesPotatoes Washington: Washington: Cucumbers, Dry Beans, PotatoesCucumbers, Dry Beans, Potatoes


Presentation Will Focus on Three Presentation Will Focus on Three Periods of TransformationPeriods of Transformation

Discuss Why the Transformations Took Discuss Why the Transformations Took PlacePlace

Present Strategies and Structures Present Strategies and Structures Utilized for Redesign During Each PhaseUtilized for Redesign During Each Phase

Review Financing ApproachesReview Financing Approaches Welcome Kevin Murphy from Pro-FacWelcome Kevin Murphy from Pro-Fac Provide a Member-Relations PerspectiveProvide a Member-Relations Perspective Allow time for DiscussionAllow time for Discussion


Three Phases of RedesignThree Phases of Redesign

1.1. First Phase starts with the Formation of the First Phase starts with the Formation of the Cooperative in 1961 and runs to 1994Cooperative in 1961 and runs to 1994

2.2. Second Phase Starts with Acquisition of Second Phase Starts with Acquisition of Curtice-Burns Operations in 1994 and ends Curtice-Burns Operations in 1994 and ends in 2002in 2002

3.3. Third Phase Begins with Inclusion of Vestar Third Phase Begins with Inclusion of Vestar Capital, an Equity Partner Who Becomes Capital, an Equity Partner Who Becomes Majority Owner of Processing and Marketing Majority Owner of Processing and Marketing Assets in 2002 to todayAssets in 2002 to today


Phase 1.Phase 1.

PF Formed to Help Salvage Fruit and PF Formed to Help Salvage Fruit and Vegetable Processing in New YorkVegetable Processing in New York

This Period Saw Dramatic Restructuring This Period Saw Dramatic Restructuring in the Industry in U.S. and NYin the Industry in U.S. and NY

Post WWII Saw Dramatic Decline in Post WWII Saw Dramatic Decline in Number of Firms and PlantsNumber of Firms and Plants

Two Such Firms Located in W.New York Two Such Firms Located in W.New York – Curtice Brothers and the Burns-Alton – Curtice Brothers and the Burns-Alton Corp. Came up for SaleCorp. Came up for Sale

[email protected]


GLF Steps InGLF Steps In The Grange League Federation, GLF The Grange League Federation, GLF

(later became Agway) was the major (later became Agway) was the major supply cooperative operating in the supply cooperative operating in the Northeast in the 1960’s Northeast in the 1960’s

Producer concern over the future of the Producer concern over the future of the Fruit and Vegetable Processing Industry in Fruit and Vegetable Processing Industry in New York StateNew York State

GLF had seen the negative impact of the GLF had seen the negative impact of the loss of processing firms on it’s members loss of processing firms on it’s members as well as on it’s supply and input salesas well as on it’s supply and input sales


GLF/Agway as a CatalystGLF/Agway as a Catalyst

GLF Acted as a Catalyst to Effect the Merger GLF Acted as a Catalyst to Effect the Merger of two family canning business to form Curtice-of two family canning business to form Curtice-Burns, (CB)Burns, (CB)

Concurrently Helped to Form and Capitalize Concurrently Helped to Form and Capitalize Pro-Fac Cooperative, (PF)Pro-Fac Cooperative, (PF)

Pro-Fac is a Contraction of the terms Pro-Fac is a Contraction of the terms “Producers” and “Facilities”“Producers” and “Facilities”

GLF (and later Agway) Assisted in Developing, GLF (and later Agway) Assisted in Developing, Financing, and Managing the Joint Venture Financing, and Managing the Joint Venture Between CB and PFBetween CB and PF


Having Observed Fruit and Having Observed Fruit and Vegetable Cooperative FailuresVegetable Cooperative Failures The Founders of Pro-Fac Observed a Number of Pitfalls The Founders of Pro-Fac Observed a Number of Pitfalls

that Failed Cooperatives Encountered:that Failed Cooperatives Encountered:• Being under-capitalizedBeing under-capitalized• Carrying the expense of an over supply of raw Carrying the expense of an over supply of raw

product in inventoryproduct in inventory• Inexperienced management that did not understand Inexperienced management that did not understand

the market for member productsthe market for member products• Marketing single crops and a lack of product Marketing single crops and a lack of product

diversificationdiversification• Not allowing professional management to operate at Not allowing professional management to operate at

arms length in daily operationsarms length in daily operations• Lack of diverse sources of capitalLack of diverse sources of capital• Inability to turn around unprofitable operations lacking Inability to turn around unprofitable operations lacking

a strong marketing focus a strong marketing focus


Ag.Services

Crop Delivery

Member Farm

Member Farm

SpecialtyProducts

Retail

Food Service

Crop Coordination& Harvest

Food Manufacturing

BrandedProducts

Sales & Marketing

Distribution

----- F a r m P r o d u c t V a l u e C h a i n ----------

Member Farm

Member Farm

PF Functions

CB Functions

Production Planning


Summary of Curtice Burns and Pro-Fac Cooperative Integrated Agreement, 1961-1994

Curtice Burns Area Pro-Fac Cooperative

-Net proceeds derived from total sales; shared with PF 50/50-Common stock listed on AMEX, 1973

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

-Conducted all marketing activities-Owned brands, made acquisitions-Developed new products

Marketing-Recruited members from new acquisition farming areas-Reserved first right to purchase brands upon dissolution-Farm products provide basis for 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

Management & Governance

-PF and Agway had access to books and financial information-1 CB and 1 Agway director on PF 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

Supply Agreement

-Committee for each commodity-Committees determine CMV in concert with PF management and approve crop agreements-Payments made from a single, multi-commodity pool


GLF/Agway Farmer-MembersElect Directors

Pro-Fac Grower-MembersElect Directors

GLF/ Agway Inc.Board of Directors

Controlling interest in CBAppoints CB Board

Pro-Fac Cooperative (PF)Board of DirectorsAgway Rep. on Board

CB Rep. on Board

Curtice Burns (CB)Board of Directors

PF Rep. on Board

Pro-Fac Cooperative, GLF/Agway, and Curtice Burns Organization and Integrated Agreement, 1961 – 1994.

Curtice Burns (CB)Management & Staff

Pro-Fac Cooperative (PF)Management & Staff

Integrated Agreement:1. Finance2. Management3. Marketing4. Supply


Phase 2. Begins in 1992Phase 2. Begins in 1992

Agway, Holding Majority Ownership, is Agway, Holding Majority Ownership, is Forced to Sell It’s CB Interest to Raise Forced to Sell It’s CB Interest to Raise Cash Cash

The Long Standing Integrated Agreement The Long Standing Integrated Agreement Venture with CB Came to an End in 1994 Venture with CB Came to an End in 1994 as PF Purchases Agway’s Interestas PF Purchases Agway’s Interest

Created Initial Leverage on PF’s Balance Created Initial Leverage on PF’s Balance SheetSheet


Ag.Services

Crop Delivery

Member Farm

Member Farm

SpecialtyProducts

Retail

Food Service


Food Manufacturing

BrandedProducts

Sales & Marketing

Distribution


Member Farm

Member Farm

Pro-Fac/AgrilinkFunctions

Production Planning


Phase 2. DevelopmentsPhase 2. Developments

PF Becomes the First Farmer Cooperative PF Becomes the First Farmer Cooperative to Acquire a Publicly Traded Companyto Acquire a Publicly Traded Company

Later Becomes the First Farmer Later Becomes the First Farmer Cooperative with a Security (cumulative Cooperative with a Security (cumulative preferred stock) Listed on a Major preferred stock) Listed on a Major Exchange – NASDAQ (symbol PFACP)Exchange – NASDAQ (symbol PFACP)

To Signify It’s Role in Linking the To Signify It’s Role in Linking the Agricultural and Marketing Segments, CB Agricultural and Marketing Segments, CB Changed It’s Name to Agrilink Changed It’s Name to Agrilink


Grower-MembersElect Directors

Pro-Fac Cooperative (PF)Board of Directors

12 - Elected by Membership3 - Independent, appointed by

elected directors

Curtice Burns / Agrilink /Birds Eye (CB/AL/BE)

Board of Directors15 – Appointed by PF Board

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

Pro-Fac Cooperative, Curtice Burns/Agrilink/Birdseye Foods Organization, 1994-2002.

Pro-Fac CooperativeManagement & Staff

Curtice Burns / Agrilink /Birds Eye

Management & Staff


Phase 3. Begins in 2002Phase 3. Begins in 2002

Agrilink is in a Highly Leveraged PositionAgrilink is in a Highly Leveraged Position Thin Margins Limit EarningsThin Margins Limit Earnings Capacity of Members to Provide Needed Capacity of Members to Provide Needed

Equity is Being Tested Equity is Being Tested Board Explores Other Sources and Board Explores Other Sources and

Reviews Many OptionsReviews Many Options Accepts Proposal from Vestar Capital Accepts Proposal from Vestar Capital

Partners and Approved by Member VotePartners and Approved by Member Vote


Number of Pro-Fac Members, 1974 - Number of Pro-Fac Members, 1974 - 20082008

300

400

500

600

700

800

900

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Nu

mb

er

Year

Figure _. Number of Class A Pro-Fac Members

Phase 1 Phase 2 Phase 3


Pro-Fac shareholder and member Pro-Fac shareholder and member capitalization and investment, 1974-2008capitalization and investment, 1974-2008..

0

50

100

150

200

250

300

0

50

100

150

200

250

300

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Va

lue

per

Mem

ber

(No

min

al,

$0

00

)

To

tal

(No

min

al,

$M

ill.)

Year

Figure _. Total Pro-Fac Shareholder and Member Capitalization and Investment

PF Shareholder/Member Equity/Capitalization PF Equity/Capitalization per Member

PF Class A Common Stock per Member



Commercial market value (CMV) of raw product Commercial market value (CMV) of raw product deliveries, total and per member, 1962-2008deliveries, total and per member, 1962-2008

0

20

40

60

80

100

120

140

160

0

10

20

30

40

50

60

70

80

9019

62

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Tho

usan

d 20

06 D

olla

rs P

er M

embe

r

Mill

ion

2006

Dol

lars

Year

Figure _. Real Commercial Market Value (CMV) of Raw Product Deliveries, Total & Per Member

Total CMV Average CMV per MemberSources: Pro-Fac, Curtice Burns, & Agrilink Annual Reports, Pro-Fac SEC 10-K Filings



Pro-Fac debt levels and debt ratio, Pro-Fac debt levels and debt ratio, 1974 - 2008 1974 - 2008

0%

20%

40%

60%

80%

100%

120%

0

200

400

600

800

1,000

1,20019

74

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Deb

t Rat

io (

%)

Tot

al L

iabi

litie

s, n

omin

al $

mill

.

Year

Figure _. Pro-Fac debt positions, measures of solvency

Total Liabilities Debt Ratio (%)

\

Sources: Pro-Fac, Curtice Burns, & Agrilink Annual Reports, Pro-Fac SEC 10-K Filings



Ag.Services

Crop Delivery

Member Farm

Member Farm

SpecialtyProducts

Retail

Food Service


Allen’sFood Manufacturing

Bird’s Eye BrandProducts

Sales & Marketing

Distribution


Member Farm

Member Farm

PF & Farm Fresh First, LLCFunctions

Minority Share of BEF

Birds Eye FoodsFunctions

Vestar Majority Owner of BEF

Supply agreements

Allens FoodsFunctions

Private LabelProducts

PrivateLabelProducts

Sales &Marketing


Grower-MembersElect Directors

Pro-Fac Cooperative (PF) – 41%Board of Directors

12 - Elected by Membership3 - Independent, appointed by

elected directors

Birds Eye Holdings LLCBoard of Directors

9 – Vestar2 – Appointed by PF board

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

Pro-Fac Cooperative, Vestar, & Birds Eye Foods Organization, 2008

Pro-Fac CooperativeManagement & Staff

Birds Eye Foods, Inc.Management & Staff

Vestar Capital PartnersPrivate Equity Firm

Vestar LLCCapital Investment - 56% Management - 3%


Phase 3. DevelopmentsPhase 3. Developments In August 2002, Vestar Becomes Majority In August 2002, Vestar Becomes Majority

Owner of Agrilink (approx. 56%)Owner of Agrilink (approx. 56%) Agrilink Name Changed to Birds Eye Foods, Agrilink Name Changed to Birds Eye Foods,

BEFBEF PF:PF:

• Maintains significant minority ownership of BEF Maintains significant minority ownership of BEF (approx. 40%) with management accounting for (approx. 40%) with management accounting for (approx.4%)(approx.4%)

• Has 10 year supply agreementHas 10 year supply agreement• Receives $10 million annually for 5 yearsReceives $10 million annually for 5 years• Can secure $1 million line of credit for each of 5 Can secure $1 million line of credit for each of 5

yearsyears


Phase 3. DevelopmentsPhase 3. Developments

Bird Eye Foods Rolls Out Successful New Bird Eye Foods Rolls Out Successful New ProductsProducts

Vestar Sells Processing Plants and Private Vestar Sells Processing Plants and Private Label Business to Allens, Inc. in 2006Label Business to Allens, Inc. in 2006

Vestar Subsidiary- BEF Holdings Vestar Subsidiary- BEF Holdings Distributes 120 Million to PF Distributes 120 Million to PF

PF Uses Distribution to Redeem Equity and PF Uses Distribution to Redeem Equity and Pay Dividends on Selected SecuritiesPay Dividends on Selected Securities


Management and Governance for Management and Governance for Each PhaseEach Phase

Phase I.Phase I.

Phase II.Phase II.

Phase III.Phase III.

Integrated Agreement Includes Integrated Agreement Includes ManagementManagement

Interlocking Boards of DirectorsInterlocking Boards of Directors

Create Board for Subsidiary and Create Board for Subsidiary and Meet JointlyMeet Jointly

Manage All Phases of OperationsManage All Phases of Operations

Board Representation on Holding Board Representation on Holding Company BoardCompany Board

PF Manages Supply and PF Manages Supply and Procurement Operations OnlyProcurement Operations Only


Information and Knowledge for Information and Knowledge for Each PhaseEach Phase

Phase I.Phase I.

Phase II.Phase II.

Phase III.Phase III.

Valuable feedback from processing and Valuable feedback from processing and marketing arm of CBmarketing arm of CB

Interlocking Boards of Directors Exchange Interlocking Boards of Directors Exchange valuable knowledgevaluable knowledge

PF & Subsidiary Boards Meet JointlyPF & Subsidiary Boards Meet Jointly Strong Market Signals Transmitted Back to Strong Market Signals Transmitted Back to

PF from Birdseye FoodsPF from Birdseye Foods

Board Representation on Holding Board Representation on Holding Company Board – BEF, LLCCompany Board – BEF, LLC

Limited Access to Market Info. from Limited Access to Market Info. from Privately Held FirmsPrivately Held Firms


Phase Strategy Financing Structure

1 Buy Plants & Integrate Operations with Marketing Firm

*Member Equity*Diversity of Sources*Tap into Pubic Markets

Joint Venture withIntegrated Operations

2 Vertical Integration

*Maximize Level of Member Equity*Debt Used for Leveraged Buyout

Acquired JV Firm and Major National Firm as Subsidiary

3 Interact with Private Equity Firm

*Continue Access to Public Markets*Raise Capital from Private Equity Firm

*Act as Preferred Supplier *Assume Minority Position in Holding Co.


SummarySummary

The PF story present a unique case in the The PF story present a unique case in the world of cooperativesworld of cooperatives

A Number of “A Number of “FirstsFirsts” for a farmer ” for a farmer cooperative: cooperative: • leveraged buyout of publicly traded company,leveraged buyout of publicly traded company,• having a security listed on a major exchangehaving a security listed on a major exchange

Continue to Change and Adapt to New Continue to Change and Adapt to New Players and MarketsPlayers and Markets


Summary, cont’dSummary, cont’d

Utilized a number of innovative strategies to Utilized a number of innovative strategies to overcome potential constraints encountered by overcome potential constraints encountered by traditional agricultural cooperatives:traditional agricultural cooperatives:• Transferable delivery rightsTransferable delivery rights• Multi-commodity poolMulti-commodity pool• Diverse set of crops and productsDiverse set of crops and products• Board geographic membership baseBoard geographic membership base• Conversion of equity to publicly traded securities to Conversion of equity to publicly traded securities to

create liquidity for member investment create liquidity for member investment • Partnering with successful firms and capital groupsPartnering with successful firms and capital groups


Current Situation for Most MembersCurrent Situation for Most Members

Significant Increase in Prices for Most Significant Increase in Prices for Most Crops (Input costs also increasing)Crops (Input costs also increasing)

Growing Demand Results in Increased Growing Demand Results in Increased Acreage for Most CropsAcreage for Most Crops

$120M Distribution in 2007 Generated $120M Distribution in 2007 Generated Higher ROEHigher ROE

Situation Varies Across Crops and Situation Varies Across Crops and RegionsRegions

It Remains to Be Seen, How Long It will It Remains to Be Seen, How Long It will LastLast


Phase Relationship Understanding of Investment

InformationProvided

1 OK Poor A Lot

2 Better Poor Some, Not As Timely

3 Minimal Good Some, Not As Timely

Brian M. Henehan and Todd M. Schmit bmh5@cornell Dept of Applied Economics and Management

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