010370 Does Probe Mean Weaker Tyson-IBP Deal?

Chicago - Disclosure by IBP Inc. of the extent of accounting problems at one of its units, including alleged mismanagement and theft, has heightened concern on Wall Street that poultry giant Tyson Foods Inc.'s $3.2 billion bid to buy the beef packer might be too high.

Dakota Dunes, South Dakota-based IBP said it closed the books on a Securities and Exchange Commission review of its financial records. But a list of financial irregularities highlighting problems first announced in November at Chicago-based DFG Foods, an hors d'oeuvres maker IBP bought in 1998 for $91 million, may lead to legal action against DFG's former owners, IBP said.

IBP provided scant details on the allegations, which also include potential manipulation of financial records. It said its investigation of DFG revealed a payment of nearly $8 million to DFG's sellers, which was tied to performance of the business after the sale of the company. The payment was not warranted, IBP said.

“The halo is not as shiny as it once was,” said U.S. Bancorp Piper Jaffray analyst George Dahlman. “I assume IBP's disclosure has to shake Tyson's confidence. They will probably feel they have to dig deeper and wider and smarter in order for them to really known what the financials are.”

“I think Tyson will look for a lower price, a price adjustment,” added Prudential Securities analyst John McMillin.

IBP also said it took a $60.4 million charge in its fourth quarter for goodwill associated with DFG, below an earlier forecast of a writedown of up to $108 million. In a statement released Tuesday, it said it will use the results of its audit as the basis for legal action if it decides to recover losses. It declined to provide details on a separate allegation of property theft.

“The SEC financial review is over,” stressed IBP spokesman Gary Michelson.

IBP said its overall operating earnings in the quarter fell well below year- ago levels. Fourth-quarter net earnings before unusual and nonrecurring items totaled $35 million, or 33 cents a diluted share, compared to $88 million, or 82 cents per diluted share, a year earlier. The totals exclude $41 million in net charges due to the DFG charge, the company said. Sales in the quarter rose to $4.4 billion from $4.1 billion.

The company also said it expects its 2001 earnings to be in the range of $1.80 to $2.20 a share.

Tyson Responds Amid Earnings Warning

A Tyson spokesman would not comment directly on the findings at DFG, but restated his company's recent position that it continues to monitor progress in IBP's discussions with the SEC. The company is waiting for IBP to file its quarterly regulatory filing with the federal agency before issuing a more definitive statement, he said.

“It is still too early to determine what effect these issues will have on the transaction structure,” said the spokesman, Ed Nicholson.

Separately, Tyson (NYSE:TSN - news), the largest U.S. chicken producer, cut its earnings guidance for the second quarter to break-even on Tuesday, citing costs of a product recall, severe winter weather, higher grain costs and pricing.

It is the second warning in past year for Tyson, which has struggled with oversupply in the U.S. poultry market. It raised concern about Tyson's ability to digest an acquisition that began late last year with a bidding war between Tyson and giant pork producer Smithfield Foods Inc. (NYSE:SFD - news).

“They've still got issues to deal with at home,” said Piper Jaffray's Dahlman. “It leaves us in a neutral position on Tyson and really not liking the IBP acquisition.”

Tyson, which previously forecast a profit of 6 to 10 cents a share for the second quarter ending March 31, said it would produce near break-even earnings in the quarter. Analysts on average predicted 9 cents a share on average, according to First Call/Thomson Financial, down from 16 cents a share last year.

One arbitrager who declined to be named said the market was cheered that IBP's writedown on DFG was only $60.4 million rather than the earlier estimate of $108 million. Shares of IBP, which have a 52-week trading range of $13.25 to $29.31, rose $1.30 in New York Stock Exchange trading to $23.75. Shares of Tyson, with a range of $8.50 to $14.63, fell 73 cents to $12.74.

Still, the arbitrager said that speculation still remained that Tyson might try to negotiate a lower price, opening the door for Smithfield to reenter the bidding process.

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