Ground beef processor files for bankruptcy, blames ‘pink slime’

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A national ground beef processor owned by Los Angeles private equity firm Yucaipa Cos. and basketball Hall of Famer Magic Johnson filed a bankruptcy petition seeking protection from creditors, blaming, in part, bad publicity over products containing so-called pink slime.

AFA Foods Inc. said it sought bankruptcy protection because it was “faced with an immediate and unanticipated liquidity crisis” and was unable to pay vendors last week without a loan, which banks refused to provide.

The company, straining with too much capacity and heightened competition, was struggling to post a profit when sales began to fall sharply because of “an unfounded public outcry over the use of boneless lean beef trimmings,” or BLBT, Ron Allen, its interim chief executive, wrote in a court declaration.

AFA has seven facilities nationwide, including two in Vernon. The Southern California plants have been operating “well below capacity” and one will be closed indefinitely this week, the company said. It did not provide details about likely layoffs among its 850 employees.

The company said it supplies beef to major retailers, such as Safeway and Wal-Mart Stores, and fast-food outlets, including Burger King, Jack in the Box, Carl’s Jr. and Wendy’s.

In its petition, filed Monday in U.S. Bankruptcy Court in Delaware, AFA listed assets of $219.6 million and debts of $197.3 million. Last year’s revenue, it said, was $958 million.

AFA, based in King of Prussia, Pa., is a consolidation of various independent meat processors acquired at various times since 2008 by the Yucaipa Johnson Corporate Initiatives Growth Fund, a venture consisting of Johnson and Yucaipa, which is controlled by billionaire Ron Burkle.

The company said it intended to use the bankruptcy process to “to pursue the prompt sale” of assets to maintain as much value as possible with the least amount of disruptions and layoffs.

The beef trimmings — beef scraps that have no fat and are treated with ammonium hydroxide to eliminate potential bacteria — have been dubbed “pink slime” by critics for their pinkish tinge.

The U.S. Department of Agriculture has approved the use of BLBT for the last two decades and recently reiterated its position that the product is safe.

Celebrity chef Jamie Oliver has been virulent in his attacks on the trimmings, denouncing them as unappetizing and unhealthy. The negative publicity quickly reached a crescendo, resulting in ground beef containing the trimmings to be pulled from school cafeterias, supermarkets and even some fast-food restaurants.

The negative publicity over BLBT exploded nationally March 7 with a report on “ABC World News,” Allen said. That was just in time for an expected seasonal upturn in sales as people fire up patio grills for burgers and other barbecue dishes.

“This controversy has dramatically reduced the demand for all ground beef products,” Allen said. “Almost all retail grocery stores have succumbed to public pressure to reduce or eliminate the sale of products including BLBT, as well as public requests to prominently label products containing BLBT.”

More than 650 meat industry workers have lost jobs in Kansas, Iowa and Nebraska, according to the National Cattlemen’s Beef Assn.

Two BLBT providers, Cargill Inc. and Tyson Foods Inc., said they did not expect to close any plants as a result of the ongoing pink-slime controversy, though both expect a drop in ground beef demand. Beef Products Inc., a processor, last week temporarily suspended production at three of its four facilities.

All of the meat processing companies have been slow to grapple with the growing pink-slime hullabaloo, even though there doesn’t seem to be much evidence that their products are particularly unhealthy, said Bill Marler, a Seattle lawyer who specializes in food safety and food poisoning cases.

“My only complaint about this product is I think they could have been more up-front with the public,” Marler said. “When companies are not open about what their product is and what it contains, positive and negative, people get concerned and assume the worst.”

The meat industry failed itself by not staying abreast of social media and online forums for signs of trouble, said Jonathan Bernstein of Bernstein Crisis Management in Sierra Madre.

“They lost control of the message,” he said. “Perception is everything. If enough people perceive that something is wrong, it’s wrong. Reassurances that something’s safe from groups that are now distrusted are useless at this point.”

Lifsher reported from Sacramento, Hsu from Los Angeles.