Chicken farmers sue Ukrainian investor over failed venture

Farm Forum

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’ two North Carolina 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 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, N.C., 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 North Carolina 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.

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, N.C., and Mocksville, south

-west of Winston-Salem, N.C. 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 that 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.”

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 scheme 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.”