010107 Tyson Shares Fall on Fear of IBP Purchase

Chicago - Shares of Tyson Foods Inc., the largest U.S. chicken producer, fell on Tuesday, as investors wanted more convincing on the company's deal to buy IBP Inc. for $3.1 billion in cash and stock in a deal that will make Tyson the dominant U.S. meat seller.

The stock decline takes Tyson shares below the “collar” that had been set to provide beef and pork processor IBP shareholders some price protection, knocking roughly $100 million off the initial value of the deal. Springdale, Arkansas- based Tyson also agreed to assume $1.5 billion in IBP debt.

The decline comes while investors are waiting to be convinced that the $30- a-share deal will add 15% to Tyson's earnings as soon as the deal closes, an assertion Tyson made Monday. Tyson expects the deal to close by Valentine's Day.

“People still aren't convinced that this is so accretive,” Christine McCracken, agribusiness analyst at Midwest Research, said. “They want more support for the fact that it's going to be accretive.”

McCracken said she expected the deal to add 12-15 cents to Tyson's earnings, in line with the company's estimates.

Tyson shares closed down 15/16 at $11-13/16 in New York Stock Exchange trading. The stock has a 52-week range of $8-8/16 to $17-6/16. IBP shares were up $1-1/4, or 4.67%, at $28, a new two-year high.

The drop in Tyson shares pushed the stock through the bottom of a $12.60 to $15.40 per share “collar” that was included in the deal to give IBP shareholders some price protection. IBP shareholders will at most receive 2.381 Tyson shares of each IBP share under terms of the deal. So if the stock continues to trade below the collar, then the acquisition could be worth less than $30 a share.

“A Transforming Event”

On Monday, Dakota Dunes, S.D.-based IBP accepted the Tyson offer. The half- cash, half-stock bid was chosen over a $32 a share all-stock bid from Smithfield Foods Inc., the world's largest hog and pork producer.

IBP said it will not comment on the decision to take the Tyson bid until documents on the deal are filed with the Securities and Exchange Commission later this week.

Smithfield shares closed up $2.07, or 6.81%, at $32.47.

“I think longer-term, the Smithfield-IBP combination would have been a better deal for IBP shareholders, but there's no doubt that this is a transforming event for Tyson,” Jeffrey Kanter, food analyst at Prudential Securities, said. As the dominant U.S. meat seller, Tyson will become a stronger company, Kanter said.

But the Smithfield bid also was likely to have faced more resistance from regulators and lawmakers than Tyson's bid, because of concern that a combination of Smithfield and IBP, the No. 1 and No. 2 U.S. pork producers, would have reduced competition.

Though there is no similar overlap with Tyson, some lawmakers argued that the Tyson deal could also receive strong scrutiny in Washington.

“The ever-increasing integration in agriculture destroys competitive markets for independent producers,” U.S. Sen. Paul Wellstone, a Democrat from Minnesota, said. “By allowing agribusiness conglomerates to increase their bargaining power, independent farmers have fewer buyers to choose from, and less leverage to get a good price.”

Tyson currently controls 25-30% of the poultry market, while IBP has a similar share in the beef market and about 18% of the pork market, a Tyson spokesman said.

But Tyson Chairman and Chief Executive John Tyson said the company expects to increase sales by offering more products, which should benefit farmers who raise cattle and hogs.

“Our job is to sell more beef and pork,” the chairman said in a conference call with investors and analysts. “If we sell more beef and pork, we need more cattle and hogs.”

Industry Reaction

Beef and pork industry groups and farmers said they will be closely watching the regulatory approval process of the deal.

“We have already contacted the Justice Department about looking into the merger very carefully. Not only to look at its effect on consumers but also its effect on producers,” said Mary Kay Thatcher, deputy director of government relations at the American Farm Bureau Federation.

In a statement, George Hall, president of the National Cattlemen's Beef Association, stressed that that the key areas regulators should monitor before approving the deal include relationships with producers, labor and customers; Tyson's view of the beef industry; and a competitive structure “for the fair and open markets for live cattle.”

Last week, Tyson said the Justice Department asked for additional information regarding the Tyson plan to acquire IBP. Tyson officials said on Tuesday that the information request had a very narrow focus related to its live swine business.

Officials from the Justice Department did not return repeated calls for comment.

The battle for IBP was sparked two months ago when the company said it had agreed to be bought out for $22.25 a share by a group led by an affiliate of investment bank Donaldson, Lufkin & Jenrette. Shareholders were vocal in their disapproval of that deal, which they felt dramatically undervalued IBP.

The Tyson deal is “certainly a lot better than where they started,” Barbara Kyrillos, senior analyst at Brandes Investment Partners, which owns about 9% of IBP's shares, said.

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