Description

There seems to be a lot of smoke surrounding the chicken production industry over the last few years. Given the continued negative attention companies in this space have been getting, both by the Department of Justice and end users, there might actually be a fire in the kitchen.

What is Alleged?

In September 2016, Maplevale Farms filed a lawsuit against Tyson et al. alleging chicken production companies “had colluded to fix, raise, maintain and stabilize chicken prices.” Subsequent suits were filed by other purchasers, with 1,200+ ultimately validating their purchase amounts over the alleged collusion period (2009 – 2019). In 2019, the Department of Justice stepped in, halting the discovery process for 6 months while it pursued a criminal investigation. In April 2019, grand jury subpoenas were served to several chicken producers, including Tyson.

But did they do it?

Three months after Maplevale Farms lawsuit was filed, Tyson’s then CEO Donnie Smith announced that he would be stepping down from his position. On June 2, 2020, a grand jury indicted four executives from various chicken production companies. Eight days later, Tyson issued a press release stating that it “has been fully cooperating with the DOJ as part of its application for lenience under the DOJ’s Corporate Leniency Program.”

Tyson’s application for the DOJ’s Corporate Leniency Program would indicate that they were culpable in some manner. In order to apply for this program, the applicant must confess to illegal activity. Below is taken from the Updated (Jan 3, 2023) Frequently Asked Questions About the Antitrust Division’s Leniency Program:

“…to obtain a conditional leniency letter, the applicant must confess to its involvement in the illegal activity. To make this confession, applicants (through their employees and corporate representative) must admit that they came to an agreement or understanding with co-conspirators to fix prices, rig bids, or allocate markets, customers, products, territories, or employees. The agreement need not be express, formal, or written. It need not be spoken at all; it may be understood or inferred from the applicant’s and co-conspirators’ actions. The applicant must also admit that the illegal activity either occurred in the flow of or substantially affected trade or commerce among the states or with foreign nations, that it continued into the limitation period, and that it is not immunized by U.S. law. When the illegal activity involves foreign conduct or foreign commerce, the applicant must admit a sufficient connection to the United States such that U.S. law applies.” (emphasis added)

If they did it, what’s at stake?

While there are no explicitly stated figures for the alleged damages to be found in the un-redacted court filings, we can estimate a range based on disparate pieces of evidence presented throughout the case. There are a few key components of calculating this estimate:

·         The time period spanning the alleged collusion.

·         Total purchases made by plaintiffs from defendants during the alleged collusion period.

·         Magnitude of overcharge on those purchases.

·         Market share of each defendant.

In documents filed supporting a motion to distribute settlement proceeds (see 1:16-cv-08637, Docket Entry 5431), we get the following pieces of information:

·         Full Class Time Period:  January 1, 2008 to December 20, 2019

·         Total Validated Purchases: $175.99B

We are also able to get market share information from the Order on Summary Judgement, which was filed on June 30, 2023 (see 1:16-cv-08637, Docket Entry 6641):

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The final factor, the extent of overcharge, is harder to nail down but has ranged from 20% - 50% in various court filings, depending on the period being discussed.

Using the above datapoints, we can get a rough sense of the magnitude of alleged damages:

·         $176B of purchases x 20% overcharge = $35.2B damages

·         $176B of purchases x 50% overcharge = $88B damages

The above estimates are for the specific, single damages to purchasers. However, Sherman Antitrust Act violations successfully litigated automatically apply treble damages and award of attorney fees to ongoing plaintiffs. If plaintiffs succeed in these suits and combining the above estimates with company-specific market share data, we get to the following estimates of damages attributable to Tyson:

·         Tyson: $7.3B - $18.3B damages trebled to $21.9B - $54.9B

o   Market Capitalization: ~$17B

OK, that’s a lot, but is it already priced in?

As of 3Q 2023, Tyson has accrued $583M related to its role in the chicken-price fixing scheme, $434M of which has been paid out in various settlements. However, the remaining $149M accrual does not seem adequate to cover what liabilities remain. As previously mentioned, total validated purchases totaled ~$176B over the period in question. The distribution of those purchases is very much weighted to the largest claimants:

·         Top 10 purchasers’ cumulative value - $86B (48.9% of total)

·         Top 20 purchasers’ cumulative value - $107B (60.8% of total)

·         Top 30 purchasers’ cumulative value - $119B (67.6% of total)

While we can’t know for sure exactly which plaintiff corresponds to a specific Claimant Number listed in the validated claims filings, we can deduce some range of outcomes based on the plaintiff’s reported revenues and correlate with a range of validated claims. The 30th largest purchaser (as represented in the validated claims list) had purchases of $1B, the 20th largest purchaser $1.3B, the 10th largest purchaser $4.4B, the 5th largest purchaser $8.4B, and the top purchaser $16B. Below are a handful of plaintiffs that have yet to settle with Tyson but likely fall into the top 30 purchaser group:

·         Sysco Corporation (~$76B revenue)

·         McLane Company, Inc. (~$50B revenue)

·         Compass Group, USA (~$29B revenue)

·         Kraft Heinz Foods (~$26B revenue)

·         BJ’s Wholesale Club (~$19.3B revenue)

·         Aramark (~$16B revenue)

·         Wawa, Inc. (~$13B revenue)

·         Gordon Food Services (~$13B revenue)

·         Conagra Brands (~$12.3B revenue)

·         Winn-Dixie Stores, Inc. (~$5.4B revenue)

If we assume the above 10 plaintiffs make up the 15th – 24th largest claims, the implied total purchases are $14.5B. If we use the 5th – 14th largest claims, the implied total purchases are $43.7B. Using the same overcharge % data from above, the implied range of single damages for just these 10 remaining plaintiffs is $2.9B - $21.9B, with the trebled damages range being $8.7B - $65.7B.

Using market share data from above, Tyson would seemingly be liable for $1.8B - $13.7B of damages to the above 10 plaintiffs, not to mention the other 60+ plaintiffs and associated attorney fees, relative to their ~$17B market capitalization.  The company trades at an NTM P/E of ~20x. The E of ~$900M is likely to be under significant pressure as settlements continue and court cases progress. For the adventurous, there are additional rabbit holes of Pork, beef, and turkey price fixing cases to which Tyson is also a party.  To our knowledge, they have not yet effectively admitted guilt and thrown themselves at the mercy of the justice department in those cases, so they are harder to handicap.

Are people talking about this?

Given the magnitude of potential liabilities, you would expect analysts on both the sell-side and buy-side would inquire into the situation. That does not seem to be the case. Searching through all of Tyson’s earnings and analyst day transcripts, there are only 3 questions asked since 2016, the most recent being in May 2020. In the last 3 years, Goldman Sachs research reports on Tyson list litigation as a potential risk, but do not provide any further remarks or analysis.

Trial Timelines and Plaintiff Tracks

This case has multiple plaintiff groups following different tracks, some of which are pursuing additional claims than those of other classes. Here is a brief rundown of the current trials, scheduled trials, the parties involved, and the claims being litigated:

Track 1 Direct Purchase Plaintiff Trial

o   Start Date: 9/12/2023

o   Status: Ongoing

o   Claims being litigated: Sherman Act claims (supply reduction) only

Commercial Institutional Indirect Purchaser Plaintiff Trial

o   Start Date: 3/04/2024

o   Status: Scheduled

Commercial End User Plaintiff Trial

o   Start Date: N/A

o   Status: Not yet scheduled

Track 2 Direct Purchase Plaintiff Trial

o   Start Date: N/A

o   Status: Will be scheduled after Indirect and End-User class trials

o   Claims being litigated: Sherman Act claims (supply reduction) and bid-rigging

o   Summary of Plaintiffs: Wal-Mart, Sysco Foods, McLane, Kraft Heinz, Conagra Brands, Nestle, Target, U.S. Foods, ALDI, Chick-fil-A, Sodexo, McDonald’s, etc.

Conclusion

In summary, there is seemingly some credence to the allegations that price fixing occurred. While it is hard to know and quantify what the result will be, the magnitude of potential liabilities does not seem to be on investors’ radar screen or priced into the share price of publicly traded meat processors. While the above analysis relates solely to litigation alleging price-fixing of chicken, Tyson is also a defendant in 3 additional cases alleging price-fixing of beef, pork, and turkey. As of the most recent 10-Q, Tyson has not accrued any contingency liability for these additional cases, of which beef and pork could be of similar damages size to the chicken case. It’s important to note that the potential future liabilities stemming from these cases are not limited to the individual company’s portion of damages. Antitrust claims “provide for joint and several liability, meaning that plaintiffs can recover any amount, up to the full damages awarded, from any individual defendant (or combination of defendants) of the plaintiff’s choice.” In other words, Tyson could be seen as the deepest pockets at the table and a prime target for plaintiffs to collect from first.

Below is a list, based on PACER filings, of the four price-fixing related antitrust cases and the defendants listed in each:

Catalyst

• Antitrust/Price-fixing liabilities exceed expectations.