001217 Tyson Foods Offers $2.8B Bid for IBP

Little Rock, AR - Tyson Foods Inc.'s $2.8 billion bid to acquire beef and pork heavyweight IBP Inc. would give the poultry giant an avenue for strong growth despite a flat market for poultry, analysts said.

“Chicken demand has flattened out,” said Andrew P. Wolf of BB&T Capital Markets. “Growth has started to reach its limit, so they probably need it now more than ever.”

IBP Inc. is the country's largest producer of beef and second-largest producer of pork.

Merging it with Tyson would create a company with 30% of the beef market, 33% of the chicken market and 18% of the pork market, Wolf said.

“Then you've got a powerhouse in all three categories,” he said.

IBP, based in Dakota Dunes, S.D., issued a statement saying it would consider the proposal. The meatpacker already is considering two competing bids.

Investors sent IBP's shares up nearly 9% on the news, while Tyson shares fell 9%.

John Tyson, Tyson chairman, president and chief executive, said his offer was superior to competing bids made by Virginia-based Smithfield Foods Inc., the world's largest hog producer and processor, and a group including IBP senior management.

“We envision that the IBP organization will continue to operate its business much as it has in the past, and we are not faced with the problem of having to shut down overlapping production facilities,” Tyson said.

“In addition, our proposal has a far higher degree of certainty for IBP shareholders in that it is unlikely to draw the harsh criticism and likely regulatory scrutiny already being directed toward the Smithfield offer.”

Any merger involving IBP is expected to be reviewed by the Justice Department for antitrust concerns. In Congress, Midwest lawmakers say livestock producers have been hurt by previous mergers in the meat industry and are wary of the efforts to take over IBP.

“I understand this may be a cause for celebration on Wall Street, but our country's hard-pressed family farmers and ranchers are not cheering one bit,” said Sen. Paul Wellstone, D-Minn.

Tyson “has a long history of vertical integration” that “could be potentially devastating” to beef and pork markets, Wellstone said.

Sen. Tom Harkin, D-Iowa, said it is “critical” for the Justice Department to consider the impact of a Tyson-IBP merger on producers.

“Large agribusinesses through mergers, acquisitions, and strategic alliances are already controlling more and more of the production and processing of our food and agricultural commodities,” Harkin said.

Christine McCracken, an analyst with Midwest Research, said a Tyson-IBP combination would be a good fit and help both companies adapt to changing times.

“There's a trend right now in the meat market toward case-ready products, moving the processing function away from the retailer. It's just a more profitable business this way,” McCracken said.

“Case-ready” means the product arrives at the retail store butchered and packaged and practically ready-to-eat, eliminating the need for an in-house butcher and allowing the company to offer a higher-priced product.

“What Tyson did in the 80s with cutting up chicken and putting it into nuggets, that's the sort of thing that people are doing now with beef and pork,” McCracken said.

Messages left for IBP were not immediately returned.

Under the Tyson proposal, IBP shareholders would receive $26 for each of their common shares. Half would come in the form of cash; half would be in stock.

Tyson said the offer was not conditioned upon it getting financing for the deal. The company said it could finance the cash portion from already available sources.

Smithfield Foods Inc. said in a statement that it's offer is superior to Tyson's.

“Indeed, we believe that the Smithfield-IBP combination is the more attractive combination given our experience in the meat business, the synergies we can generate by combining our companies, our track record of successfully integrating management teams, and our history of creating shareholder value,” Smithfield said.

On Nov. 12, Smithfield Foods made an unsolicited proposal to South Dakota- based IBP for $25 a share in stock.

The previous month, IBP entered a merger agreement for a leveraged buyout at $22.25 in cash per share by a group comprised of affiliates of investment bank Donaldson Lufkin & Jenrette, some members of IBP senior management, Archer Daniels Midland Company and Booth Creek Partners.

In afternoon trading Monday on the New York Stock Exchange, IBP stock was up $2.13 to close at $24.88; Tyson shares were off $1.31 to close at $12.69.

Smithfield shares were up 80 cents, or 3%, to $29.36, also on the Big Board.

McCracken said IBP shareholders are anticipating a bidding war.

“At this point, Tyson shareholders don't know what to think,” she said. “I would anticipate Smithfield making a counter offer, and at this point Tyson could go even higher. So it's difficult to call a winner.”

Smithfield spokesman Josh Pekarsky would not comment on whether the company would sweeten its offer. Smithfield's statement said it would “continue moving forward with the due diligence process and evaluating our next steps, consistent with our disciplined approach to investing our shareholders' assets.”

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