001215 Tyson Joins Bidding For Meat Processor IBP

Chicago, IL - A food fight broke out in the U.S. meat industry on Monday as No. 1 chicken processor Tyson Foods Inc. made a $2.8 billion bid to devour No. 1 beef processor IBP Inc., trumping an earlier offer from the nation's biggest pork processor, Smithfield Foods Inc.

Tyson, based in Springdale, Arkansas, said it would pay $26 per share, half stock and half cash, for IBP, based in Dakota Dunes, South Dakota. The bid was a dollar per share more than Smithfield offered last month.

Combining Tyson and IBP would create a diversified meat processing powerhouse with more than $21 billion in sales in all three of the largest- selling meat categories -- beef, pork and poultry.

“We believe our vast experience in value-added convenience foods and case- ready retail products can accelerate their progress and insure their success,” said Tyson Chairman and Chief Executive John Tyson in a prepared statement.

But it remains unclear whether Smithfield, based in Smithfield, Va., will sweeten its bid, which IBP's special committee of directors had publicly encouraged prior to Tyson's Monday offer.

Late in the day, Smithfield released a statement pointing out what it said were the advantages of its bid, including its experience in the meat business and its track record of integrating management teams.

It did not address a higher offer directly, but alluded to the possibility, indicating that it will move ahead with due diligence and evaluate its “next steps.”

“It seems to me the door is wide open for a higher bid from Smithfield,” said Terry Bivens, a Bear Stearns analyst.

Tyson's offer includes the assumption of about $1.4 billion in IBP debt, giving the transaction a total value of about $4.2 billion. In addition to Smithfield, the unsolicited bid beats an earlier agreed-upon management buyout offer led by a unit of investment bank Donaldson Lufkin & Jenrette (DLJ) that promised IBP $22.25 a share in cash.

“I think the market is telling us that the DLJ bid has a probability of zero,” said Paul Korngiebel, a portfolio manager with San Diego-based Brandes Investments, which owns more than 9% of IBP's outstanding shares. “We're excited that the value we saw in the company is being unlocked.”

A representative for the DLJ group did not return calls seeking comment.

ANTITRUST SCRUTINY LIKELY

The Tyson deal is sure to draw close scrutiny from federal antitrust authorities, the U.S. Agriculture Department and Congress.

On Monday Republican Sen. Charles Grassley and Democratic Sens. Tom Harkin and Paul Wellstone urged regulators to closely review the offer.

“I'm concerned that the proposal will increase the amount of concentration in the meatpacking industry to the point where it will hurt the independent farmers trying to get fair prices for their products,” said Grassley, who represents Iowa.

On a conference call with analysts and investors, Tyson said it hoped its offer would not invite as much antitrust scrutiny as the proposed Smithfield deal, which has been criticized for giving Smithfield control of more than one- third of the $20-billion market for pork products in the U.S.

“We are prepared to move very quickly and enter into a confidentiality agreement,” Steve Hankins, Tyson's chief financial officer, said on the call.

The deal would strengthen Tyson's ability to serve its retail and food service customers, which have been rapidly consolidating to cut costs and simplify supply chain management.

“You'd have brand equity that can go beyond chicken as a one-stop shop for retailers,” said Prudential Securities analyst Jeffrey Kanter. “Clearly, this makes them a dominant fresh meat company.”

APPROVAL PENDING

The transaction still must meet approval by IBP, which issued a brief response on Monday indicating that its special committee, outside counsel and financial advisor would consider the Tyson bid.

“The special committee was really prompt in responding to Smithfield,” Dean Hanish, an IBP representative, said. “I assume it would be prompt in this case too.”

Tyson's Hankins said the proposed merger would be “significantly accretive” to Tyson's earnings but declined to elaborate, noting the company's earlier outlook for earnings per share of 8 to 12 cents in both the first and second quarters stands.

Tyson executives said they envisioned that Robert Peterson, IBP chairman and chief executive, would remain with the combined company.

“IBP is a very good company with a very strong management team,” Hankins said.

Details of Tyson's offer include a cash tender offer for 50.1% of the outstanding IBP common stock, Tyson said. After the conclusion of the tender offer, Tyson would merge with IBP and each remaining share of IBP common stock would be converted into shares of Tyson Class A common stock at a fixed price of $26 per IBP share.

Tyson's bid stands as long as its stock price averages between $12.60 and $15.40 per share before the deal closes. If its shares trade outside that range, then the bid is subject to a maximum exchange ratio of 2.063 Tyson shares, and a minimum of 1.688 Tyson shares, per IBP share.

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