0103109 Will Smithfield Renew IBP Bidding?

Chicago - Pork producer Smithfield Foods Inc., ousted in January from its attempt to buy beef producer IBP by rival bidder poultry giant Tyson Foods Inc., is now in the driver's seat.

Tyson withdrew its $3.2 billion cash-and-stock offer for IBP, leaving the company stranded at the altar as baffled industry watchers looked on. Shares of IBP dropped nearly 30% Friday to close at $16.40 a share, reflecting uncertainty over its prospects.

“Frankly, we don't know what to expect at this point,” said Paul Korngiebel, a portfolio manager at Brandes Investment Partners, which holds about 9% of IBP's outstanding stock. “We were anticipating that maybe we'd get a lower price, but that there would be a deal.”

Smithfield, seen by Wall Street as a prudent and selective buyer, can now call the shots, analysts said, returning to the bargaining table with a price lower than its most recent stock-for-stock bid of $32 a share.

Shares of Smithfield, based in Smithfield, Va., were trading below $28 a share at the time it entered an initial bid for Tyson in November. The shares were off 14% Friday, closing at $32.50.

“I think if Smithfield wants to return to the playground, they're in a very good position,” said Salomon Smith Barney food analyst Jaine Mehring. “Smithfield, on several occasions had said that if the Tyson deal ever fell apart, they would have strong interest. You have to kind of go on the assumption that that's still the operative feeling.”

Wait-and-see Approach

Smithfield, located in southern Virginia, said that it will take a wait-and- see approach toward IBP.

“Right now we are not doing anything. We haven't requested anybody to look at this,” said Richard Poulson, vice president and senior adviser to Smithfield Chairman Joseph Luter. “We're just going to read the news and follow this.”

“We were taken by surprise,” he added.

So too was IBP, which said it had no inkling that the deal was about to fall apart. A source familiar with the matter said that high-level discussions designed to close the deal had occurred throughout the past two weeks between senior management at IBP and Tyson.

“We are shocked by Tyson's announcement,” IBP said in a statement released Thursday. “As recently as this week, our sense was that Tyson had every intention of going through with the transaction.”

Tyson surprised Wall Street with a withdrawal that cited “numerous breaches” of the companies' merger agreement that could not be resolved. In a letter to IBP Chairman Robert Peterson, Sprindale, Ark.-based Tyson said it had relied on misleading information when it entered into the merger agreement.

The withdrawal followed an SEC review of IBP's accounting practices and the recent disclosure by IBP of alleged mismanagement at a Chicago-based appetizer subsidiary. Some analysts were skeptical that IBP's books were solely behind the withdrawal.

“I truly believe what's happening is they didn't want to do the deal, and were getting nervous about mad cow,” said Prudential Securities analyst Jeff Kanter. “At the end of the day, they were looking at chicken fundamentals getting better and beef fundamentals which were getting worse.”

Legal Battle Expected

Before Smithfield makes a move, it will likely wait out a pending legal battle between Tyson and IBP. The first move came late Friday, when IPB filed a lawsuit in a Delaware Chancery court seeking to force Tyson to honor the merger agreement.

“Tyson's actions are completely unjustified by anything that has transpired and we will do what is necessary to protect our shareholders and our company,” IBP Chairman Peterson said in a statement.

Separately, analysts said they believe that Tyson will attempt to recover a $59-million breakup fee it paid to investment banking firm Donaldson Lufkin & Jenrette on IBP's behalf, ending that DLJ's attempt to take IBP private.

“What I think happens now is Smithfield sits on the sideline and waits,” said Dan Veru, executive vice president of Palisade Capital Management, which holds about 2.6% of Smithfield's outstanding stock. “Smithfield has a track record of making very accretive acquisitions. They know what to buy and they know how to pay for it.”

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