0103112 Tyson Calls Off Purchase of IBP

New York - Shares of IBP Inc. skidded 28% lower after poultry giant Tyson Foods Co. called off a $3.2 billion deal for IBP that would have made Tyson the nation's top beef and pork producer.

Investors also sent shares of Smithfield Foods Inc. lower on concern that the hog producer might be tempted to revive its earlier failed effort to acquire IBP.

Thursday's decision came nine days after IBP said an investigation into its appetizer unit, DFG Foods, uncovered potential manipulation of financial records and product theft, and mismanagement by former unit managers.

“While we continue to believe that the combination of IBP and Tyson would have created the premier protein company in the world, we simply cannot endorse a decision to complete the transaction under the facts as we understand them today,” said John Tyson, chairman and chief executive of the Springdale, Ark.- based Tyson.

In a statement, IBP said it was “shocked by Tyson's announcement and said the company didn't believe Tyson had “any valid basis” to terminate the merger agreement.

“This comes as a complete surprise. As recently as this week, our sense was that Tyson had every intention of going through with the transaction,” the statement said.

IBP spokesman Gary Mickelson said the company had no other comments regarding the deal.

On Friday, IBP shares dropped $6.39 to close at $16.40 a share on the New York Stock Exchange , while Tyson rose $1.97, or 17%, to close at $13.47 a share. Shares of Smithfield dropped $5.35, or 14%, to close at $32.50 also on the NYSE.

Tyson's agreement to buy IBP was announced Jan. 1, after a bidding war with Virginia-based Smithfield Foods, the world's largest hog producer and processor.

The decision by Tyson to drop the deal was not surprising, said George Dahlman, food analyst with U.S. Bancorp Piper Jaffray.

“They were taking on more than they could really handle here,” he said.

Officials with IBP, based in Dakota Dunes, S.D., said on March 20 they expected the purchase to go through because the company had resolved accounting issues delaying the deal. They also said they could not release more details of the investigation because of possible legal action.

IBP amended financial reports for the Securities and Exchange Commission after the problems were uncovered, but Tyson officials said Thursday that the terms of the deal had been based on incorrect filings submitted earlier to the SEC.

“Unfortunately, we relied on that misleading information in determining whether to enter into the merger agreement,” Tyson general counsel Les Baledge wrote in a letter faxed to top IBP officials.

After the problems at IBP were made public, analysts doubted the poultry giant would be willing to pay the agreed-upon $30 per IBP share price in cash and stock.

The findings of the investigation led to a $60.4 million charge against IBP's fourth-quarter earnings released earlier this month, less than the $108 million previously estimated.

For the quarter ended Dec. 30, IBP lost $6.25 million, or 6 cents per share, compared with earnings of $76.59 million, or 71 cents per share, in the year-ago period.

IBP employs about 50,000 people. Besides its pork and beef production business, the firm also makes prepared foods for the retail and food service industries.

Tyson has about 68,000 workers, with operations in 18 states and 15 countries. Besides its trademark chicken producing operation, the company is also a leading pork producer and the country's No. 2 maker of corn and flour tortillas.

A combination of Tyson and IBP would have created a company with 30% of the beef market, 33% of the chicken market and 18% of the pork market, analysts said.

Tyson officials predicted the combined company would have had annual sales of about $24 billion a year, making it the leading poultry, beef and pork producer in the nation.

Analysts had mixed opinions on whether Smithfield might take another look at the possibility of buying IBP.

“I think Smithfield's interest has not gone away,” said John McMillin, a food industry analyst with Prudential Securities.

Andrew Wolf, a retail and consumer analyst with BB&T Capital Markets, wasn't so sure.

“If IBP was a keeper, Tyson would have kept it,” he said. “Since Tyson decided not to do the deal strongly suggests that it isn't the company that either Smithfield or Tyson thought it was when they were bidding.”

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