NC chicken farmers suing Ukrainian billionaire

Case mired in bankruptcy with growers’ debt rising

dbracken@newsobserver.comFebruary 3, 2013 

  • Oleg and Omtron According to media reports, Oleg Bakhmatyuk first got into the egg business in 2003 when he purchased a Soviet-era egg producer in western Ukraine. He later worked for Ukraine’s state oil and gas company, Naftogaz Ukraine, before turning his attention full time to agribusiness in 2007. Over the past five years, his Cyprus-based company, Avangardco Investments, has built up a vast egg-production operation in the Ukraine that includes 19 poultry farms for breeding hens. World Poultry Magazine ranked the company as the second-largest egg producer in the world in 2011, and the company has become a major exporter of eggs to Iraq and other countries in the Middle East. Bakhmatyuk sold a 22.5 percent stake in Avangardco in May 2010, raising $208 million in an initial public offering on the London Stock Exchange. Bakhmatyuk owns the remaining 77.5 percent of Avangardco’s shares through several different entities, one of which is Omtron Ltd. Omtron USA, the company that owns the Townsends facilities in North Carolina, has listed both Omtron Limited and Quickcom Ltd. as its parent company in filings with the N.C. Secretary of State’s office. Quickcom is another entity owned by Bakhmatyuk, according to Avangardco’s regulatory filings. Staff writer David Bracken
  • The ripple effect Townsends, like most chicken processing operations in the United States, is “vertically integrated,” meaning the company operates a feed mill and hatchery and signs contracts with different farmers who raise chickens until they are ready to be processed. The structure means that when a processor goes out of business it can quickly lead to financial ruin for an entire network of farmers. Omtron was sued for breach of contract by two types of farmers: pullet farmers, who produce young hens for breeder houses, and broiler farmers, who care for and raise the chickens until they reach the desired processing weight. Farmers typically borrow large sums of money upfront to build their chicken houses. They are dependent on a processor to provide them with chickens and chicken feed to keep their operations running. Staff writer David Bracken

When a young Ukrainian billionaire acquired the North Carolina operations of chicken processor Townsends out of bankruptcy in early 2011, the deal seemed to symbolize the increasing globalization of our food supply.

Oleg Bakhmatyuk, the majority owner of Ukraine’s largest egg producer, had elaborate plans to turn the facilities into the American outpost of a food empire that would strategically move protein around the world like pieces on a chess board. Chickens grown on North Carolina farms would be fattened with cheap grain imported from the Ukraine, while the dark meat processed in Townsends’ Siler City and Mocksville facilities would be exported to markets in the Middle East, Ukraine, Russia and China.

As it turned out, Bakhmatyuk’s plan was more fantasy than revolutionary. After failing within six months, the Townsends operations have sat idle for more than a year while Bakhmatyuk (bak-mah-TEWK) and his executives mull their next move. Left in limbo are the heavily indebted chicken farmers whose livelihoods are tied to the Townsends facilities – and who are now desperate to be rid of their one-time white knight.

“He was filthy rich and had no idea what he was getting into; that’s exactly what it sounded like,” said Mickey Bowman, 48, a third-generation Randolph County chicken farmer. “He didn’t care who he hurt along the way over here. It was nothing to him to close this down.”

Bowman is one of about 130 chicken farmers who sued Omtron USA, the company Bakhmatyuk used to buy the Townsends assets, for breach of contract in state and federal court. The litigation has turned into its own chess match, with the farmers using the courts to seek damages for their terminated contracts and to try and force Omtron to sell.

They won a victory of sorts in November, when Omtron filed for bankruptcy and now must follow a court-mandated time frame to liquidate its assets. But those in North Carolina who have had dealings with Omtron say trying to predict the company’s next move would be foolish.

“Where it’s going to go from here and what’s going to happen, I don’t know,” said Kim Decker, a poultry marketing specialist with the state Department of Agriculture. “It depends on how they proceed. Everything seems to have been a stalling tactic thus far. Is bankruptcy another one of those? I don’t know.”

Through the company’s Philadelphia-based lawyer, executives with Omtron declined to comment.

Early promise

In hindsight, it’s easy to view Bakhmatyuk’s plan as half-baked and those who believed it would succeed as naive. But at the time, it seemed plausible that the Ukrainian’s global reach and deep pockets were just what were needed to turn the Townsends operation around.

Townsends, which traces its roots back to 1891, had been forced into bankruptcy by the rising cost of corn – the main ingredient in chicken feed – and the decline in U.S. chicken consumption caused by the recession. The entire industry has struggled to remain profitable in recent years as overproduction and rising feed prices eroded profit margins.

Townsends’ downfall threatened more than 1,000 jobs in Siler City, west of Raleigh in Chatham County, and Mocksville, southwest of Winston-Salem. It also jeopardized an entire integrated poultry operation that included a network of chicken farms, a hatchery and a feed mill.

Bakhmatyuk, it was assumed, had the financial resources to invest in the operations, make them more efficient, and withstand periods of elevated corn and fuel prices. His wealth comes from his 77 percent stake in Avangardco Investments, which is based in Cyprus but trades on the London Stock Exchange and has a market capitalization of around $750 million. Bakhmatyuk, 38, is the company’s chairman; his sister serves as CEO.

But poultry represented Bakhmatyuk’s attempt to diversify, as his holding company makes most of its money producing sugar, eggs and corn. He also had no experience operating in the U.S., a more heavily regulated and competitive market. He hired David Purtle, a former Tyson Foods executive, to be Omtron’s CEO.

It’s unclear whether Bakhmatyuk ever visited the North Carolina operations he spent more than $35 million acquiring and upgrading. The Ukrainian executive North Carolina officials usually dealt with was George Kikvadze, a Bakhmatyuk adviser whom everyone just referred to as “George K.”

“We believe in American brands,” Kikvadze, who no longer works for Omtron, told The News & Observer shortly after the company acquired the Townsends assets. “Oleg came for the first time to America in November (2010). He just fell in love with the country. ... We believe in America and the American recovery.”

A plan goes bad

Whatever reservations some chicken farmers may have had about their new Ukrainian partner were muted in June 2011, when Omtron offered three-year contracts to the group of farmers tasked with growing the chickens to their ideal weight. Although economic conditions in the industry were bleak, the contracts did not include a clause allowing Omtron to terminate them for economic reasons.

“It was business as usual,” said John Benton, a Chatham County farmer who had been growing chickens for Townsends since the late 1990s. Benton, 64, hoped the Omtron contract would provide him with enough income to pay down the debt on his 180-acre farm so that he could retire.

While Omtron was securing a steady supply of birds, it was also moving quickly to upgrade the Townsends plants. Omtron spent $8 million installing new equipment in the Siler City plant, removing the organic production line and re-engineering it to focus on producing leg quarters for the export market. It also was exploring ways to make the operations more competitive by reducing water usage at the Siler City plant and making enhancements to the feed mill.

“It was an indication that they were trying to make the facilities as efficient, and as effective, as they could,” said Dale Carroll, the state’s deputy secretary of commerce.

But as Omtron ramped up production, reality quickly began to expose the flaws in Bakhmatyuk’s plan. The price of corn and diesel fuel, already high, spiked over the summer. Meanwhile, Omtron’s plan to take advantage of opportunities in international markets proved to be based on several faulty assumptions.

China and Russia moved to restrict imports of chicken in an effort to boost their own domestic poultry production, limiting Omtron’s ability to sell Townsends’ dark meat in those markets.

Omtron’s plan to import cheap grain from Ukraine ran into several snags. Decker, the state marketing specialist, said the company had not considered that the grain would need to be treated for disease before being imported. The company also appeared to badly misjudge the politics in its own country.

“They thought they had the inside track with the Ukrainian government so that they could get feed at a certain price, and then the government changed their mind and put the grain on the world market,” Decker said.

Omtron was soon losing $7 million to $8 million a month, Bakhmatyuk told the Kyiv Post in November 2011.

“Facing significant losses each month,” the company’s lawyers said in one of Omtron’s court filings, “the company determined that it had no choice but to close its poultry processing facilities.”

Trouble all around

The confidence and optimism that the Ukrainians had exuded before the announced shutdown was soon replaced by a lack of engagement. State and local officials rushed in to try to expedite a sale of the facilities to a buyer who would keep the operations running. Several interested parties came forward, but Omtron never seemed able, or willing, to cut a deal.

“The negotiations would reach a certain point, and then the communication would stop,” Decker said. “There were several instances where people were at the price that they requested, and they either moved the mark or quit talking to them.”

Omtron stopped making the lease payments on most of the equipment in the Mocksville facility, which led the lender to reclaim it and sell it, said Terry Bralley, president of the Davie County Economic Development Commission. Two manufacturers that installed new equipment in the Siler City plant sued Omtron, alleging breach of contract and intent to defraud. One of the companies, Fabco Equipment, said Omtron notified Fabco of plans to move the equipment overseas, even though it had not paid for the machinery.

Omtron’s largest creditor, according to its bankruptcy filing, is the town of Mocksville, which says it is owed $760,000 for lease payments on the remaining equipment in the facility there. Omtron is disputing the claim. The town of Mocksville purchased the equipment, an oven line, in 2009 with a $700,000 grant from the Golden Leaf Foundation that was to create 103 jobs.

The equipment was leased to Townsends at fair market rates. Omtron assumed the lease after acquiring Townsends but only made one payment. The $760,000 figure includes both the outstanding lease payments and penalties for the company failing to meets its job creation and investment requirements.

Omtron also owes nearly $290,000 to two law firms that the company no longer employs, including $117,000 to the North Carolina firm Parker Poe Adams & Bernstein.

The chicken farmers are asking for unspecified damages in their civil suits, though many of them also say they want Omtron to unload the assets to another buyer interested in restarting the operations. It’s unclear whether such a buyer still exists, given the added cost that would come from having to restock the pipeline of chickens and re-establish a network of buyers.

Omtron has said in court filings that it believes the best way to get a good price and protect the interests of the local economies is to hire an investment banking firm to conduct a sale.

Some of the chicken farms already are in foreclosure, and other farmers say they can’t hold out much longer. The farmers’ ability to catch on with another processor is limited by geography – to keep fuel costs down, companies typically won’t transport chickens beyond a certain distance.

Transitioning to a new processor can also require a farmer to invest more money to meet that processor’s specifications for growers.

Bowman, the Randolph County farmer, was able to secure a three-flock contract with Mountaire Farms’ processing plant in Lumber Bridge, but the deal filled only seven of his 10 chicken houses.

“That’s really just a drop in the bucket for us,” he said. Bowman owes the bank $1.5 million – a debt secured by his 170-acre farm.

“We’ve struggled just about as long as we can and fought this about as long as we can,” he said. “A lot of other people are in the same boat.”

John Benton, the lead plaintiff in one of the lawsuits against Omtron, got tired of waiting around for Bakhmatyuk. Last fall, he began selling the equipment inside his six chicken houses, hoping to pay enough of his debt to save his farm and retire.

Benton said he understands Omtron’s need to make changes given the amount of money the company was losing. What he can’t understand is how the company could shut down the operation and then not talk to legitimate buyers who would keep the operation going.

“Don’t just leave us hanging,” he said. “Don’t keep playing with our lives.”

Bracken: 919-829-4548

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