Pioneer Foods chief executive Phil Roux said last week that this was the logical next step for Quantum Foods as its management attempted to position the business to optimise value for shareholders.

According to BusinessReport, both companies said tough market conditions over the past two to three years had caused significant margin compression leading to the closure of numerous poultry businesses and industry consolidation.

In an effort to improve efficiencies, Pioneer Foods, whose brands include White Star super maize meal, Bokomo cereal products and Ceres beverages, had to retrench about 100 employees in October last year.

Astral Foods chief executive Chris Schutte said: "Quantum has investigated options to exit from its broiler processing and marketing of chicken in terms of its restructuring process in the Western Cape without exiting from primary agriculture in total."

In a joint statement, Astral and Pioneer said Quantum and County Fair had entered into the long-term supply agreement on condition that Quantum close its Tydstroom abattoir in Durbanville.

"Quantum has commenced a restructuring of its operations, which is aimed at ceasing broiler processing in the Western Cape, and will supply a large per centage of its production of live broilers to Astral’s Country Fair abattoir, where the birds will be processed and distributed to the greater Western Cape market," the firms said.

Mr Schutte said Tydstroom Poultry would become a contract broiler grower for Astral.

Pioneer Foods announced its intention to unbundle Quantum Foods in September last year as a result of challenges in the broiler industry. In its results for year to last September, Quantum posted an operating loss of R19 million.

In its recent trading update for the four months to January, Pioneer said revenue rose by 8.1 per cent if Quantum was excluded. But including it, the group’s revenue growth slowed to 6.9 per cent, compared with 12 per cent in the previous corresponding period.

"Quantum will maintain its breeding operations as well as the rearing of broilers together with the feed supply in the value chain, with Astral processing, distributing and marketing the chicken," Mr Roux said.

Astral said it would invest about R80m on expansion at its County Fair facilities to accommodate the additional broilers. The expansion would take about five months and increase Astral’s total broiler processing capacity to about 5 million birds a week.

"With this expansion, Astral will create a significant number of jobs at County Fair and Tydstroom will preserve jobs in the farming value chain," Mr Schutte said.

Ron Klipin, a portfolio manager at Cratos Wealth, said this should be a shot in the arm for the Pioneer Foods plan to unbundle its Quantum business.

"Pioneer Foods wants to move away from the chicken and other commodity-type business and focus on higher-margin businesses," he said.

Klipin believed the long-term supply agreement would make Quantum a better investment, while Pioneer Foods was fortunate to partner with Astral, which was a leader in the local poultry industry.

"The chicken industry is not so attractive any more, as it faces major challenges, such as the oversupply of chicken from cheap imports still coming from the EU, as well as high feed costs, and the whole issue of brining levels."

He also believed that the deal would benefit the struggling Astral Foods.

"They are bigger players and they might come out of this reasonably well as industry consolidation may, in due course, result in a better supply and demand balance."

Astral’s shares dropped 1.6 per cent to close at R86 yesterday. Pioneer Foods fell 0.66 per cent to close at R83.94.