000877 Smithfield Buys 6.3% Stake in Rival IBP

Chicago, IL - Leading U.S. pork producer Smithfield Foods Inc. has accumulated a 6.3% interest in rival IBP Inc., making it the third-largest stakeholder in the nation's largest processor of fresh beef.

Smithfield acquired 6.6 million IBP shares, valued at $112 million based on the current stock price, a filing made this week with federal regulators shows.

The Smithfield, Va-based company in its filing with the U.S. Securities and Exchange Commission said the shares were not purchased for the purpose of changing or influencing IBP.

IBP shares ended up 1 at 17-1/8, off a May high of 18-7/8. Shares of Smithfield Foods finished 1-11/16 higher at 27-15/16, near its recent high in May of 29-3/4.

IBP, based in Dakota Dunes, SD, is the nation's second-largest fresh pork producer behind Smithfield.

Analysts said it was unlikely Smithfield bought the stake as a prelude to purchasing IBP outright because government regulators probably wouldn't allow such a merger of giants.

“They are principal competitors, so I don't think they are doing it to foster a business relationship. The only reason they'd do it is if they think the stock is going up,” said Prudential Securities analyst John McMillin.

Leonard Teitelbaum, analyst at Merrill Lynch, said the industry could benefit from further consolidation because its current infrastructure supports demand that no longer exists. A long-term strategic initiative between the two companies or other large players would not be surprising, he said.

“It's just an industry that, in order to be healthy and survive, needs consolidating,” Teitelbaum said.

IBP has 106 million shares outstanding.

Smithfield has taken large positions in IBP off and on in the past and began accumulating its current stake last summer, Teitelbaum said. Smithfield sees the investment as a long-term play on a company whose price/earnings ratio is below its own, he said.

“This is not the first time this has happened,” the analyst said.

Grain processing company Archer Daniels Midland Co. (NYSE:ADM - news) owns a 12.2-percent stake in IBP and Brandes Investment Partners LP of San Diego holds 7.5%, an IBP spokesman said.

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