001139 Smithfield Foods Offers to Buy IBP

Richmond, VA - Smithfield Foods Inc. has offered to buy meatpacking giant IBP Inc. for $2.7 billion in stock in a bid to break up IBP's earlier deal to sell to a management-led buyout group.

IBP is the nation's largest supplier of fresh beef and pork, while Smithfield is a leading pork producer. A deal would add to Smithfield's product line, enabling it to compete more effectively against diversified meat producers.

Smithfield Chairman Joseph W. Luter III said that a merger between his company and IBP shouldn't result in plant closings because IBP would add beef products, rather than merely overlapping pork products.

“We expect divestiture of one or two plants” because of antitrust concerns, he said. “But we don't anticipate a substantial number of job cutbacks at all. They're a beef and pork company, we have pork.”

He also said he did not expect the merger would result in an increase in the company's purchasing power, which would harm Midwestern farmers by driving down hog prices.

Agriculture Secretary Dan Glickman said his department would give the deal a “very close, serious review” and then advise the Justice Department on whether to approve it.

Sen. Charles Grassley, an Iowa Republican who is in line to become chairman of the Senate Finance Committee next year, said the bid needs “vigorous scrutiny” by the government.

“Agribusiness, especially in the meatpacking industry, has become so concentrated that family farmers often question whether they can get a fair price for their products. They wonder if big companies compete unfairly and engage in predatory business practices.”

In its unsolicited bid, Smithfield said IBP shareholders would receive $25 of Smithfield Foods common stock for each IBP share.

That was nearly 20% higher than Friday's closing price of IBP common stock and a 12.4 premium over a management group's cash buyout offer of $22.25 a share in cash.

Smithfield Foods, which already owns 6.6% of IBP shares, would also assume $1.4 billion of IBP debt in the deal.

Andrew Wolf, a senior analyst at BB&T Capital Markets in Richmond, said the Smithfield offer is superior overall to the buyout group's offer.

“It's a greater value for shareholders. And when you look at the economics of it, a strategic buyer like Smithfield can buy greater synergies than a financial buyer,” Wolf said.

Financing is also a key point, Wolf said. “Smithfield has stock for currency, there's no financing involved,” as in the case of the buyout group's plan.

IBP said in a statement that a special committee of board members along with the company's financial advisory is examining the proposal. The company said it would have no additional comment until the review is completed.

On Monday, Smithfield shares were down $3.63, or almost 12%, to close at $28 on the New York Stock Exchange, while IBP shares rose $1.38, or nearly 7%, to close at $22.25.

IBP's board had accepted the lower management buyout offer six weeks ago from a group that included members of IBP's senior management and an investment fund controlled by Wall Street investment firm Donaldson, Lufkin and Jenrette.

Luter criticized the competing offer, saying it would put the financial burden on IBP “and would only benefit selected insiders, not all IBP shareholders.”

Smithfield did not give IBP a deadline for its offer, Luter said.

“DLJ, of course, could increase their offer,” he said. “That just remains to be seen whether they elect to do that or not.”

In addition to supplying fresh beef and pork, IBP is a diversified producer of hundreds of consumer-ready food products, including deli meats, pizza toppings, pizza crusts, wraps, appetizers, hors d'oeuvres, soups, sauces and side dishes, as well as tanned leather products for leading automobile, upholstery and apparel manufacturers.

Based in Dakota Dunes, S.D., IBP has more than 60 plants in North America, joint venture operations in China, Ireland and Russia, and sales offices throughout the world. The 40-year-old company, which generated sales of $14.1 billion in 1999, employs 49,000 people.

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