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Out of the frying pan.

Despite Buyout Talk, Earnings Drop in '92, "Red" Hudson Says His Company Is Sitting Pretty -- and Not for Sale

THE RUMOR MILL WAS working overtime when James T. "Red" Hudson and Don Tyson met for lunch at Champions Golf and Country Club in Rogers.

Hudson is the chairman and chief executive officer of Hudson Foods Inc. of Rogers. Tyson is chairman of Tyson Foods Inc. of Springdale.

The power lunch, reportedly last year between the two chicken magnates, fueled speculative talk that Tyson was hungrily eyeing Hudson's poultry company.

Although the rumors weren't new -- "those are stories with long beards," cracks one stock analyst -- they appear to have had some basis.

Asked about Tyson's interest in Hudson Foods, Gerald Johnston, Tyson executive vice president of finance, notes his company grows through acquisitions. He acknowledges that "from time to time there have been discussions" between Don Tyson and Red Hudson.

Johnston hastens to add, though, "From time to time, there have been discussions with most every other poultry company, too. We're usually willing to buy. We've just got to find people willing to sell and at a reasonable price."

Red Hudson acknowledges he and Tyson lunched. But Hudson doesn't care to give the time frame, and he clams up on the subject of Tyson trying to buy his company.

Asked about Tyson's interest, Hudson issues a terse, "No comment."

About reports that Tyson made an offer to buy his company last year, Hudson says, "I can't comment on that."

Don Tyson reportedly has been tight-lipped about the matter, too.

For Red Hudson and Hudson Foods, last year certainly was no picnic. The company experienced a nearly 75 percent drop in earnings, which followed criticism of executive compensation and stirred rumors of a Tyson acquisition.

But there appears to be reason for optimism in 1993.

The company's first quarter revenues nearly doubled total net income for fiscal '92. And Red Hudson says money channeled back into the company for plant and product mix upgrades, combined with an upswing in poultry prices, has the company sitting pretty.

Heavy Trading

Despite the depressed earnings in '92, Hudson Foods' stock performance has been lively.

The speculation, coupled with better poultry prices, apparently helped propel Hudson Foods' stock to around $14 a share in December and greatly increased its trading volume, prompting Red Hudson to publicly say his company was not for sale.

"Probably the main reason it's not for sale is the obligation I feel toward all the people at Hudson Foods and what I think is the unlimited future of the company," he was quoted then as saying.

Any sale of the company would require Red Hudson's approval. He owns more than 99 percent of Hudson Foods' Class B majority voting stock. Company officers and directors own nearly 70 percent of the Class A stock.

He says the company, which aims for $1 billion in sales this year, has plenty of growing to do.

"We're still an ambitious company and want to grow," Hudson says. "And I think that we want to grow |the company~ not for the sake of selling it, but for the sake of becoming a better and larger company."

Even if Hudson were willing to sell, some industry watchers doubt he would sell to his rival in the Ozarks.

Hudson characterizes his relationship with Don Tyson as that of friendly competitors.

"As far as things we do together, he goes fishing and I play golf," Hudson says with a chuckle. "We're staunch competitors, but we're not enemies and I think you can say we're friends."

The geographical proximity between the two chicken-dominated food companies is frequently cited as the main reason for persistent rumors over the years that the companies would fold into one. Rogers and Springdale are but 10 miles apart, a leisurely drive along U.S. 71B.

That proximity, among other factors, would make for a nice fit if things ever changed, according to industry observers.

Also, last year Hudson Foods sold 93.5 million dressed pounds of turkey, making it the nation's 17th largest producer of turkey products. Tyson does not have a turkey division yet.

"Tyson doesn't do turkeys and it certainly seems to make at least some sense," says Napoleon H. Overton, a securities analyst with Morgan Keegan & Co. in Memphis, Tenn. "And Tyson can always use a few more chickens to sell."

Overton says he doesn't know why talk of a Tyson-Hudson merger has been so persistent, but he says he rarely goes three to six months without hearing the scenario discussed.

"I just pretty much discount it every time I hear it," he says.

"Tyson's been rumored to buy every poultry company in the world," says John McMillin, a food analyst with Prudential Securities Inc. in New York.

McMillin says Tyson is focused more on products outside the poultry industry.

Even if Red Hudson had an interest in selling his company, any serious attempt by Tyson to buy Hudson Foods could be thrown a curve by federal antitrust laws, some analysts theorize.

In terms of broiler production, Tyson is the largest integrated broiler company in the United States and Hudson Foods is sixth, according to rankings last December in Broiler Industry, a trade publication.

Tyson has almost 10 times the assets of Hudson Foods and about five times the sales.

A Man Named Red

At age 68, Red Hudson says he has no plans to relinquish the leadership helm of his company.

Hudson, who was born in Pine Bluff and reared in Tennessee, got his nickname while a naval airman during World War II, a tour of duty he says lasted "three years, two months, 14 days, five hours and 43 minutes."

"When they cut my hair real short and it was real red, people started calling me 'Red,'" he says. "I kind of liked it and promoted it."

A former feed store clerk, Hudson moved on to spend 26 years with the Ralston Purina Co.

He formed Hudson Foods in 1972 and purchased the broiler assets of Ralston Purina's West Central Region, which primarily consisted of a processing plant in Noel, Mo.

In 1986, Hudson Foods became a publicly traded company.

Twenty years and a series of acquisitions after its founding, Hudson Foods is a Fortune 500 company with domestic and international sales topping $800 million last year. The company has 14 processing facilities in 10 states and employs about 8,500 people.

Although chicken remains the core business, accounting for half of sales, last year Hudson Foods invested $47 million for capital improvements at the company's various plants and in its other food divisions.

Red Hudson says he's forecasting significant growth in the company's broiler, luncheon meats, and food service or "portioned entrees" divisions this year.

Like many poultry companies, Hudson Foods continues to try to expand its product mix to reduce its dependency on the fortunes of the commodities markets. Hudson Foods also is emphasizing more value-added products, those which undergo additional processing steps such as deboning, marinating or breading.

Analysts' Outlook

The company's efforts to diversify and add value, along with higher poultry prices and lower feed-ingredient costs, have analysts predicting good things.

After nearly three years of not recommending Hudson Foods' stock, Stephens Inc., the Little Rock brokerage firm, began recommending it again in early November.

"Our recommendation is based on an improving poultry price environment, decreasing production costs and specific improvements within Hudson's operations," Mark A. Plummer of Stephens says in a research report.

Plummer estimates Hudson Foods' sales will increase more than 11 percent this year and that net income should increase more than fivefold to $11.3 million or 78 cents per share. That compares with 15 cents per share last year.

Two other analysts who closely follow the stock -- Overton of Morgan Keegan and John Bierbusse with A.G. Edwards & Sons Inc. in St. Louis -- say they are positive about the company's earnings direction this year.

Institutional Shareholder Services Inc., a Washington, D.C., company that analyzes the proxies of public companies for institutional shareholders, finds one glaring negative in the overall company performance: lagging shareholder returns.

"While the company is pretty healthy in terms of underlying fundamentals, they're not converting the fundamentals into growth and increased share-price appreciation and that could mean a number of things," says Gary Lyons, director of research and development for ISS.

"That could mean there's money leaving the company for inflated salaries, bogus expenses, etc.," he says. "We don't try to speculate on what that means."

ISS performed a computer analysis on Hudson Foods that compared it with an industry peer group and an index of similarly sized companies.

It showed that, over the seven-year period the company has been publicly traded, total shareholder return was 1.92 percent. That compared with a peer-group return of 22 percent and a 15 percent industry return.

ISS notes, however, that Hudson Foods' rate of shareholder return increased to 15 percent over the last two years.

Salary Criticism

Last year, the company's executives came under criticism for their salaries.

At the annual meeting in February 1992, a shareholder asked, "Why are the top executives doing a lot better than the shareholders?"

Based on ISS' cash-compensation analysis of executives' salaries, Lyons says, "We're showing that they're overpaying in terms of their peers, but they're not overpaying by that much.

"We've got nothing egregious in terms of cash compensation or long-term incentive awards."

In a response to the earnings slump, Red Hudson and his top two executives -- son Michael T. Hudson, president and chief operating officer; and Charles B. Jurgensmeyer, chief financial officer and executive vice president -- did not receive salary increases or bonuses last year.

Their combined compensation was $1.1 million, according to the company's most recent proxy.

Red Hudson's compensation decreased last year to $489,204, down 43 percent from 1991, and considerably lower than the $1.1 million he received in 1989.

"We didn't do that to satisfy a critic," Hudson says. "We didn't think our performance last year justified us making the kind of money we made the year before. If we have a real good performance this year, we'll go back up."

Red Hudson also has received an average of $910,000 for each of the last three years for two aircraft he owns and leases to the company.

Certain directors and employees of the company -- including Red Hudson, his two sons, Jurgensmeyer and Hudson's son-in-law -- also own poultry farms and are paid grower fees that totaled $891,000 last year.

Hudson acknowledges the stock has not kept pace with some in the past, but he points to its recent growth as a sign of things to come.

"I think we might be one of the better kept secrets as far as our potential is concerned," he says.

"I have tremendous confidence in |Hudson Foods~ and I think there's going to come a day when our stock is going to sell for three or four times book |value~ and stockholder value will accelerate," he says.

"We've grown from a book value when I put it together 21 years ago of $300,000 to a book value of $155 million and that's not bad growth. I think we've got a base now that's something we can really build on and be proud of."

While Hudson's repositioning efforts have prepared the company to take advantage of the improving poultry cycle and an increased share of other markets, the rumors of a buyout possibly contributed to another serendipitous occurrence.

When Hudson Foods' stock reached the $12.25 per-share mark, it enabled the company to call all of its $32 million in outstanding 14 percent convertible subordinated debentures due 2008. About 75 percent of the debentures are expected to be converted into shares of Class A stock.

Red Hudson says the move, which will be completed this week, will enhance the company's equity and considerably reduce interest costs. In essence, it will put funds on the equity side of the balance sheet rather than the debt side.

With Hudson Foods in shape for a good year, perhaps the long-bearded stories about Tyson buying the company will finally die, replaced by speculation about what company Hudson Foods will buy next.

"We're looking and keeping our eyes and ears open for a company in the food business," Hudson says. "We don't want to venture outside the food business, but it could be the chicken business, it could be a lunch meat division, it could be anything within the food business that might enhance our present position in the food industry."

A Hudson History

IN FEBRUARY 1972, JAMES T. "Red" Hudson, a 26-year employee of Ralston Purina Co., bought the broiler assets of the St. Louis-based company's West Central region. With that, he formed Hudson Foods Inc. in Rogers.

The acquisition consisted primarily of a processing plant in Noel, Mo., near the Arkansas border.

Two years later, the company bought a broiler hatchery and processing facility in Hope, adding 28 million pounds of production and increasing the number of employees from 450 to 1,000.

Over the years, the Hope and Noel facilities have been expanded to include feed and live production facilities in Arkansas, Oklahoma and Missouri. Each division produces broiler products for supermarkets and institutions under the "Hudson" and private brand labels.

In 1979, Hudson Foods bought an integrated turkey-processing plant in Springfield, Mo.

With an initial public stock offering of 2.3 million shares, Hudson Foods became a publicly traded company on the American Stock Exchange in February 1986.

Four months later, the company bought Corbett Enterprises Inc., a major poultry company with operations in Alabama, Maryland, Indiana and Georgia. The acquisition, which included an egg-processing division, virtually doubled Hudson Foods' size and made it one of the 10 largest poultry producers in the United States.

In 1987, Hudson Foods bought the Kansas-based Thies Companies Inc. and its "Ohse" brand of processed luncheon meats with plants in Topeka and Wichita. Hudson Foods expanded its market presence with a 1989 purchase of a luncheon meat and turkey further-processing plant in Minnesota and the 1990 acquisition of the Texas-based "Roegelein" product lines.

In December 1989, Hudson Foods stock moved to the New York Stock Exchange.

Through the 1990 purchase of Pierre Frozen Foods Inc. of Cincinnati, Hudson Foods entered the market for frozen, portioned entrees. It expanded that division by buying an additional manufacturing plant in Caryville, Tenn., last year.
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Title Annotation:includes related article on company's history; Hudson Foods Inc.
Author:Walters, Dixie
Publication:Arkansas Business
Date:Mar 15, 1993
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