1 EXHIBIT (c)(3) HHCo, Ltd. FOR PFMI MARKET PRICING ANALYSIS OF PIERRE FOODS, INC. MARCH 27, 2001 2 At the request of PFMI, HHCo, Limited. (HHCo) has conducted an analysis of the Stock Value of Pierre Foods, Inc. in order to equitably compensate the holders of Pierre Common stock in a tendering of their shares pursuant to a going private transaction. Various methodologies were used in determining an equitable value: Book Value Tangible Book Value Asset Valuation relative to Senior Debt Obligations EBITDA - Cash Flow generation Company performance and valuations versus their direct competitors in the protein processing industry. Balance Sheet Analysis - $"000" - -------------------------------- Exhibit I - --------- The balance sheet at the end of 3Q 2001 (December 2, 2000) identifies total assets carried at a value of $162,000; Current Liabilities of $13,915; and Total Debt of $116,967, accounting for Stockholders Equity of $28,213. Included within the assets are $71,195 of net Intangible Assets, mostly arising from the 1998 acquisition of the Pierre Cincinnati plant from Tyson Foods. With 5,781,480 shares outstanding, the book value per share on December 2 was $4.88. This value includes $12.32 value per share attributed to intangibles. Pierre Foods' bank had contracted for third party appraisals on the land and buildings and all production equipment in June of 2000. The results of these independent valuations placed the fair market value of all of the assets ($5,188) under the carrying value. Further, HHCo completed a review of the underlying value of the intangible assets, most of which were recorded in connection with the purchase of the Pierre Cincinnati facility. Per the HHCo study, the net intangible assets on the Pierre books were overstated by ($48,400), representing the value of the unallocated portion of the intangibles of $28.1 million, 1/2 the value of the value attributed to "trademarks," or $20.3 million. HHCo has restated the balance sheet to eliminate the excess valuation in the fixed assets and the intangible assets. HHCo then restated the December 2, 2000 published balance sheet. This schedule is included as Exhibit I. 2 3 PFMI Study Exhibit I PIERRE FOODS BALANCE SHEET VALUATION -------------------- -------------------- Adjusted As Reported Based on Valuation 12/2/2000 Differentials -------------------- -------------------- Current Assets 52,552 52,552 PP&E 34,798 29,610 Intangibles 71,195 22,795 Deferred Items 3,455 3,455 -------------------- -------------------- Total Assets 162,000 108,412 -------------------- -------------------- Current Liabilities (less bank debt) 13,915 13,915 Debt 116,967 116,967 Deferred Taxes& Other 2,905 2,905 Equity 28,213 (25,375) -------------------- -------------------- Total Liab. & Equity 162,000 108,412 -------------------- -------------------- Tangible Net Worth (42,982) (48,170) -------------------- -------------------- # of Shares 5,781,480 5,781,480 Net Worth / Share 4.8799 (4.3890) Tangible Worth/Share (7.4344) (8.3318) compiled by HHCo 3 4 The restatement reduces the net fixed assets to $29,610, and reduces the intangible assets to a net $22,795. These value reductions, in turn, reduce the carrying book value of Pierre Foods to a negative of ($25,375). Thus, restated book value per share is calculated at ($4.39), with $3.94 of that balance attributed to the remaining fair value intangible assets. The tangible book value per share is calculated as ($8.33). This restatement also reduced Dec. 2 overall asset value to $108,412, including the $22,795 in intangibles. With outstanding debt of $116,967, clearly a liquidation of the assets would preclude any recovery for the shareholders. Because of the negative common share values, HHCo abandoned either asset valuation or book valuation from further consideration for determining an equitable pricing model for Pierre Foods in the going private transaction. However, HHCo reviewed the competitive public companies in the protein-processing segment of the food processing industry to determine the relationship of book value and tangible book value to the recent stock pricing. This study is included as Exhibit II. 4 5 PFMI Study Exhibit II COMPETITIVE BOOK VALUE ANALYSIS ------------------------------------------------------------------------ -------------- Pilgrims Pierre Hormel ConAgra Smithfield Pride Tyson Foods ------------------------------------------------------------------------ -------------- Total Book Value $Mil 873.9 2,964.1 902.9 342.6 2,175.0 28.2 # Shares Outstanding Mil 138.6 492.2 54.7 41.1 225.0 5.8 Book Value per Share 6.31 6.02 16.51 8.34 9.67 4.86 Recent Selling Price $ 21.10 $ 24.76 $ 31.15 $ 11.10 $ 13.55 1.13 Ratio of Market Price to BV 3.35 4.11 1.89 1.33 1.40 0.23 Tangible Book Value $Mil 781.3 598.1 582.8 342.6 1,238.0 (43.0) # Shares Outstanding 138.6 492.2 54.7 41.1 225.0 5.8 Book Value per Share 5.64 1.22 10.65 8.34 5.50 (7.41) Recent Selling Price $ 21.10 $ 24.76 $ 31.15 $ 11.10 $ 13.55 1.13 Ratio of Market Price to TBV 3.74 20.38 2.92 1.33 2.46 (0.15) Compiled by HHCo 5 6 The competitive comparisons of Book Value per share to market share pricing ranged from a high ratio of 4.11 per share to a low of 1.33 with wide dispersion, as compared to the Pierre foods ratio at .23. The study of comparing Tangible Book Value per share to market share pricing among the competitors, ranged from a ratio of 20.38 to 1.33, with an even wider dispersion, versus the Pierre ratio at a negative correlation. HHCo has concluded that the market valuation is not responsive to book value considerations, and has discontinued further study of this relationship. - -------------------------------------------------------------------------------- Competitive Analysis - -------------------- HHCo analyzed the recent profit and loss statements of the protein processing segment of the publicly traded food processors to determine the gross profit generation; the operating earning structure; and the final income of the competitors. This study is included as Exhibit III. 6 7 PFMI Study Exhibit III COMPETITIVE OPERATIONS "$ Mil" 1998 1999 2000 Sales and Expenses ---- ---- ---- These are the Competitors with SIC Code 2011 Sales ttm (Trailing Twelve Months) Meatpacking, that are closest in Protein - ---------------------------------- Processing with after slaughter operations Hormel 3,261.0 3,357.8 3,675.1 ConAgra 24,219.5 24,594.3 25,385.8 Smithfield 3,867.4 3,775.0 5,150.5 The overall food processing industry Pilgrims Pride 1,331.5 1,357.4 1,499.4 statistics are favorably impacted by Rymer Foods 30.2 38.9 39.9 higher margin breads, candies, Branded goods Tyson 7,414.1 7,362.9 7,158.0 Thus, only the processes protein segment ------------------------------------ has been analysed Average 6,687.3 6,747.7 7,151.5 ------------------------------------ Pierre (11/00 fcst for '01) 173.8 183.5 208.2 Total Industry (excl. Pierre) 40,123.7 40,486.3 42,908.7 ---------- Yr. 2000 Cost of Sales (excl. Depr. & Amort.) % to Sales - ------------------------------------ ---------- Hormel 2,347.1 2,321.7 2,614.9 71.2% ConAgra 20,020.0 21,125.8 20,732.8 81.7% Smithfield 3,479.6 3,235.4 4,456.4 86.5% Pilgrims Pride 1,162.8 1,137.2 1,297.6 86.5% Rymer Foods 27.6 34.0 36.5 91.5% Tyson 6,017.0 5,798.9 5,787.0 80.9% ---------------------------------------------- Average 5,509.0 5,608.8 5,820.9 81.4% ---------------------------------------------- Pierre 107.2 113.9 132.3 63.5% Total Industry (excl. Pierre) 33,054.1 33,653.0 34,925.2 ---------- ---------- Yr. 2000 Total Exp. Selling, General Admin. Exp. % to Sales % Sales - ---------------------------- ---------- ---------- Hormel 677.2 737.1 737.7 20.1% 91.2% ConAgra 2,468.8 2,598.4 2,888.2 11.4% 93.1% Smithfield 219.9 295.6 390.6 7.6% 94.1% Pilgrims Pride 58.8 76.2 85.3 5.7% 92.2% Rymer Foods 4.0 4.1 4.3 10.8% 102.3% Tyson 774.9 709.1 732.0 10.2% 91.1% ---------------------------------------------------------- Average 700.6 736.8 806.4 11.3% 92.7% ---------------------------------------------------------- Pierre 47.7 54.8 59.9 28.8% 92.3% Pierre has higher SGA costs, but less than average total expenses. Total Industry (excl. Pierre) 4,203.6 4,420.5 4,838.1 Thus, cost classification may account for the higher SGA Thus, Herth cost deemed not material to valuation. 7 8 The size of the public competitors ranged from ConAgra (Armour, Swift) with sales of $25 billion, to Rymer Foods (a troubled company under contract for sale, selling proteins to the food service industry) at $40 million volume. The other protein processors studied were Hormel, (pork); Smithfield, (pork); Pilgrims Pride, (chicken & turkey); Tyson, (chicken). Other than Rymer, Pierre Foods at $208 million sales is dwarfed in size by the other integrated processors. HHCo analyzed the Cost of Sales of these competitors as compared to Pierre. Depreciation and Amortization expenses were excluded from this cost study in order to fully compare "conversion costs" without regard to the impacts of asset structure or goodwill writeoffs. The competitors averaged latest reporting period Cost of Sales at 81.4% of sales, while Pierre is calculated at 63.5%. HHCo then analyzed the Selling, General and Administrative costs of the competition. The competition averaged 11.3% to sales for the latest period, while Pierre recorded 28.8%. To validate that differing accounting practices and classification of costs was responsible for the wide dispersion of cost ratios, the total operating costs (again excluding depreciation and amortization) was calculated, and the average for the competitors was 92.7%, with a very tight dispersion. Pierre Foods total costs were 92.3% to sales, thus, Pierre was operating at a slightly favorable cost structure to the competition. With this information, it is determined that the overall cost impact of the Herth management contract is negligible to the cost structure relative to the competition. HHCo then looked at the debt structure of the protein segment competitors, as compared to Pierre, and compared the cash flow generation, EBITDA, to determine the ability of the industry to service debt. The debt to equity structure of the competition was also studied. This debt study is included as Exhibit IV. 8 9 PFMI Study Exhibit IV DEBT AND CAPITALIZATION -------- --------- ----------- ---------- Debt % Debt % Debt to * Debt $ per Outstanding Total Debt Bal. $Mil 1998 1999 2000 to Sales to EBITDA Tot Capital Share - -------------------------------- ---- ---- ---- -------- --------- ----------- ---------- Hormel 211.0 225.9 184.3 5.0% 56.1% 17.4% 1.33 ConAgra 3,414.3 3,402.1 3,842.9 15.1% 217.8% 56.5% 7.81 Smithfield 415.8 683.9 1,301.2 25.3% 431.2% 59.0% 23.79 Pilgrims Pride 205.7 188.2 169.7 11.3% 145.7% 33.1% 4.13 Rymer Foods 3.6 3.5 3.7 9.3% -370.0% 77.1% 0.86 Tyson 2,128.9 1,803.8 1,542.0 21.5% 241.3% 41.5% 6.85 ----------------------------------------------------------------------------- Average 1,063.2 1,051.2 1,174.0 16.4% 223.7% 49.2% 6.14 ----------------------------------------------------------------------------- Pierre 117.0 117.0 117.0 56.2% 713.4% 80.6% 20.17 Total Industry (excl. Pierre) 6,379.3 6,307.4 7,043.8 * Total Capitalization=Debt+Equity ------------------------------------------------ Debt plays an important role in determining the Stock pricing, as the lenders have first priority. Huge negative to Pierre valuation ------------------------------------------------- Book Value $Mil - --------------- Hormel 813.3 841.1 873.9 ConAgra 2,839.0 2,908.8 2,964.1 Smithfield 361.0 542.2 902.9 Pilgrims Pride 230.9 294.3 342.6 Rymer Foods 4.9 2.9 1.1 Tyson 1,970.4 2,128.0 2,175.0 --------------------------------- Average 1,036.6 1,119.6 1,209.9 --------------------------------- Pierre 28.2 Tangible Book Value* $Mil - ------------------------- Hormel 708.1 742.6 781.3 ConAgra 447.3 500.1 598.1 Smithfield 348.6 439.2 582.8 Pilgrims Pride 230.9 294.3 342.6 Rymer Foods 4.9 2.9 1.1 Tyson 934.6 1,165.5 1,238.0 --------------------------------- Average 445.7 524.1 590.7 --------------------------------- Pierre (43.0) * Eliminates all intangible assets and reduces equity accordingly Compiled by HHCo 9 10 The competitors are maintaining debt levels that ranged from 5% to 25% of annual sales, for an average of 16.4%. Pierre is maintaining a debt level of 56% of sales. This range would indicate that interest payments in the industry would range from between .5% to 2.5% of sales, with the average at 1.6% to sales. Pierre is carrying an interest cost of 6% to sales. Likewise, the ratio of Debt to total Capitalization (debt plus equity) ranged from 17% to 59%, with a simple average of 41.5%, and a weighted average of 49.2%. (Rymer was excluded from this average as the company had recently undergone a restructuring). This compares to the Pierre debt to total capitalization of 80.6%. HHCo also calculated total debt to EBITDA, to determine the ability of the competition to service its debt. This calculation ranged from 56%, or slightly more than a half a years EBITDA could retire all debt (excluding interest), to 431%, or 4 and 1/3 years EBITDA would be needed to retire debt, (excluding interest). In Pierre's case it would take over 7 years cash flow to retire debt, excluding interest. Finally, HHCo looked at the debt on a per share basis, on the assumption that the stock market would devalue the market price based on the senior obligations that the company would need to satisfy before stockholder consideration. This same consideration would come into play in an acquisition for stock, as the acquirer would assume the debt obligations. With fairly wide dispersion, the competitors had a simple average of $6.14 per share of debt obligations, which, on a weighted average basis was $7.40 per share. Pierre is burdened with debt obligations of $20.17 per share, over 2.7 times the industry average, a large negative to stock valuation. In Exhibit V, HHCo additionally looked at EBITDA ratios to operating results. With the industry generating total EBITDA of $3.150Bil, on industry sales of $42.9Bil, the industry, on average, records 7.34% EBITDA to Sales. Pierre stands favorable to the industry at 7.88%, however, Pierre operations does not benefit from that cash flow, as the bulk of the cash generated is used to pay interest on the high debt level. This negates the ability to create a sinking fund to provide for the June 2006 retirement of the debt. This impact is clear in looking at final Net Income as a percent of sales. The industry (which based on the above discussed cost structure was slightly higher than Pierre) was able to generate a normalized return on sales (before reserve and unusual items) of 2.47%, while Pierre's favorable operations convert to a (1.3%) negative return on sales due to the high interest costs. 10 11 PFMI Study Exhibit V CASH FLOW AND EARNINGS --------- --------- --------- Cash Flow Cash Flow Debt to EBITDA 1998 1999 2000 to Sales to Debt Cash Flow - ------ ---- ---- ---- --------- --------- --------- Hormel 224.2 305.6 328.3 8.93% 178% 56% ConAgra 1,730.7 1,870.1 1,764.8 6.95% 46% 218% Smithfield 155.2 247.4 301.8 5.86% 23% 431% Pilgrims Pride 109.9 144.0 116.5 7.77% 69% 146% Rymer Foods (1.4) 0.8 (1.0) -2.51% -27% -370% Tyson 379.1 599.7 639.0 8.93% 41% 241% -------------------------------------------------------------- Average 433.0 527.9 524.9 7.34% 45% 224% -------------------------------------------------------------- Pierre 18.9 14.8 16.4 7.88% 14% 713% Industry Total* 3,150.4 * excl Rymer --------------------------------------------- With interest at 10.75%, most of Pierre's 14% EBITDA is used to service debt. --------------------------------------------- EPS (normalized & diluted) - -------------------------- Hormel 0.805 1.112 1.203 ConAgra 1.350 1.238 1.280 Smithfield 1.553 2.316 1.521 Pilgrims Pride 1.208 1.577 1.265 Rymer Foods (0.470) 0.010 (0.430) Tyson 0.516 1.123 0.668 -------------------------------- Average 0.992 1.475 1.101 ------------------------------ Pierre (0.466) ---------- Net Income % to Sales - ---------- ---------- Hormel 139.3 163.4 170.2 4.63% ConAgra 641.8 358.4 413.0 1.63% Smithfield 53.4 94.9 75.1 1.46% Pilgrims Pride 50.0 65.3 52.3 3.49% Rymer Foods (2.0) -- (1.9) -4.76% Tyson 25.1 241.6 151.0 2.11% ------------------------------------------ Average 151.3 153.9 143.3 2.00% ------------------------------------------ Pierre (0.5) (2.6) (2.7) -1.30% ----- Normalized Net Income (excl y/e Reserves, etc.) ROS% - ----------------------------------------------- ----- Hormel 121.1 163.4 170.2 4.63% ConAgra 641.8 589.9 612.8 2.41% Smithfield 61.7 94.9 75.1 1.46% Pilgrims Pride 50.0 65.3 52.3 3.49% Rymer Foods (2.0) -- (1.9) -4.76% Tyson 117.5 291.7 151.0 2.11% ---------------------------------------- Average 165.0 200.9 176.6 2.47% ---------------------------------------- Pierre (0.5) (2.6) (2.7) -1.30% Compiled by HHCo 11 12 Finally, HHCo compared these statistics to a per share basis, and compared the data to recent market pricing, on Exhibit VI. 12 13 PFMI Study Exhibit VI COMPETITIVE RECAP Ratios per share -------------------------------------------------- Recent price to price to Shares outstanding #mil. 1998 1999 2000 Cash Flow norm EPS Sales Book Value Tang. BV Price norm EPS Cash Flow - ------------------------ ---- ---- ---- --------- -------- ----- ---------- -------- ----- -------- --------- Hormel 147.2 142.7 138.6 2.369 1.228 26.52 6.31 5.64 21.10 17.18 8.91 ConAgra 489.4 488.2 492.2 3.586 1.245 51.58 6.02 1.22 24.76 19.89 6.91 Smithfield 37.5 41.9 54.7 5.517 1.373 94.16 16.51 10.65 31.15 22.69 5.65 Pilgrims Pride 41.4 41.4 41.1 2.835 1.273 36.48 8.34 8.34 11.10 8.72 3.92 Rymer 4.3 4.3 4.3 -0.233 -0.442 9.28 0.26 0.26 0.50 -1.13 2.15 Tyson 230.9 228.6 225.0 2.840 0.671 31.81 9.67 5.50 13.55 20.19 4.77 ------------------------------------------------------------------------------------------------------ Average - Mean 190.1 189.4 191.2 2.746 0.924 37.41 6.33 3.09 17.03 18.44 6.20 ------------------------------------------------------------------------------------------------------ Average - Weighted 3.296 1.108 44.89 7.59 3.71 21.26 19.18 6.45 --------------------------------------------------------------------------------- Pierre 5.8 2.828 -0.466 35.90 4.86 -7.41 1.13 -2.43 0.40 Industry Total 955.9 Mkt. Cap. 20320.2 Weighted Average Note: With Pierre sales per share Cash Flow M 6.45 20% below Ind. Avg., Pierre will not be able to achieve Ind. Avg. SAY 6.50% Earnings Per Share on lower revenues Compiled by HHCo 13 14 Cash flow (EBITDA) per share averaged $3.30 (weighted) for the industry, versus $2.83 for Pierre; Normalized Earnings per Share averaged $1.11 for the industry, versus ($0.47) for Pierre; Sales per share averaged $44.89 for the industry, versus $35.90 for Pierre. This latest statistic may be meaningful, as Pierre will not be able to generate as much profit per share, or, cash flow per share, as it would have to significantly outperform the industry on almost $9.00, or 20%, less in sales per share on which to profit from. We again compared the Book Value and Tangible Book Value per share, statistics that we had discounted as not being a driver of stock valuation earlier. HHCo computed Price to Normalized Earnings per share, a Normalized P/E ratio, which averaged (weighted) $19.18 for the industry; yet was ($2.43) for Pierre. With this negative position for Pierre, it was determined that EPS and P/E ratios would not be meaningful for comparative stock valuation. Finally, HHCo computed cash flow (EBITDA) per share to the recent market price for stock. With the exception of Rymer, a direct correlation exists between market pricing and cash flow per share, with most of the competitors closely trading around the mean average of 6.20 times cash flow, or the weighted average of 6.45 times cash flow. Pierre trades a fraction of its cash flow per share, 0.40, as the market probably discounts its value with the bulk of the cash flow being utilized to pay interest. Pricing Model; Exhibit VII - -------------------------- Based on the above industry correlation between cash flow per share to market value per share, it was determined that the best Pierre valuation would be to measure the market capitalization on an EBITDA multiple. As with any stock acquisition process the acquirer adjusts the cash flow value model by any debt that the acquirer assumes. The industry average of 6.5 times cash flow has been used to value a transaction to acquire Pierre Foods. With projected year 2001 cash flow of $16.4Mil it is projected that the gross enterprise value of Pierre is $106.6Mil. (6.5x$16.4). This price exceeds the December 2 asset valuation of $52.5 million for current assets and $29.6 million for the fair market value of the fixed assets, which totals $82.1Mil. The excess market value of $24.5Mil exceeds the going concern intangible value of $22.8Mil as determined by HHCo review discussed earlier. The $106.6Mil in total enterprise company valuation is adjusted downward for the debt being assumed, forecasted for March 4, 2001 at $115.1 Mil. Thus, the stock equity value is a negative ($8.50Mil), or ($0.147) per share. 14 15 PFMI Study Exhibit VII PIERRE PRICING MODEL Assume that the equitable price per share of Pierre stock is equivalent to the overall competitive protein processors ratio of market value to cash flow generated by operations. The above analysis indicates that the competition shares are trading at 6.5 times EBITDA. This pricing would indicate that the value of Pierre is 6.5 times $16.4 (projected 2001 EBITDA), or $ 106.6 Value -115.1 Less: Debt ------- (8.50) Stock Value 5,781 k Shares $(0.147) per Share Adjusting the company value for outstanding obligations results in the stock value of ($0.147) per share. -------------------------------------------------------- Pilgrims Hormel ConAgra Smithfield Pride Tyson -------------------------------------------------------- EBITDA Multiple 8.91 6.91 5.65 3.92 4.77 Value per EBITDA Multiple 2,925.2 12,194.8 1,705.2 456.7 5,099.2 Less Debt 184.3 3,842.9 1,301.2 169.7 1,542.0 -------- --------- -------- ------- -------- Ownership Value 2,740.9 8,351.9 404.0 287.0 3,557.2 Shares Outstanding Mil 138.6 492.2 54.7 41.1 225.0 Value per share $ 19.78 $ 16.97 $ 7.39 $ 6.98 $ 15.81 Price One week after 10K release $ 18.51 $ 18.19 $ 29.00 $ 8.13 $ 11.25 Correlation: Price/Value 0.94 1.07 3.93 1.16 0.71 Factor of 1.00 = perfect analytical fit Recent Price $ 21.10 $ 24.76 $ 31.15 $ 11.10 $ 13.55 Dividends/share 0.35 0.79 -- 0.06 0.16 Dividend yield may impact Yield to market 1.9% 4.3% 0.0% 0.7% 1.4% market pricing Year over year: Reported Sales Increase 9.0 3.0 36.0 10 (3.0) Reported Earnings Increase 5.0 15.0 (17.0) (20.0) (37.0) Compiled by HHCo 15 16 The industry competitors were tested using this same methodology. All company's latest reported EBITDA was grossed up by their market multiple to arrive at gross enterprise valuation, then adjusted downward for outstanding debt. This net ownership value was divided by the number of shares outstanding to arrive at a value per share. Since this study is based on historical competitor data, the value per share was compared to the competitor's market price approximately one week after the published annual form 10K was issued (that particular day with the highest trading volume, indicating that the new information was absorbed by the market). There is a very direct correlation between this valuation method to the market price of the stock. With the exception of Smithfield, which recorded a large sales increase on new acquisitions, the price to value for Hormel was .94; ConAgra 1.07; and Pilgrims Pride, at 1.16, and .71 for Tyson a fairly tight correlation. (A correlation of 1.00 would indicate a perfect fit.) Conclusion - ---------- Based on the above analysis, there is a direct correlation of a company's ability to generate cash net of debt service obligations, to the value that the marketplace places on the equity instruments. The value of the shares of Pierre Food is negligible, as the debt load the company carries negates all residual stockholder value. HHCo recommends that PFMI offer the stockholders the market price on March 27, 2001 for the Pierre shares, as the market price is far in excess of the underlying value of the stock. 16