010535 IBP's Suit Against Tyson Begins

Wilmington, DE - A top executive at meatpacker IBP Inc. testified that poultry giant Tyson Foods knew in advance of troubles at an IBP subsidiary that Tyson later cited as a reason for calling off its $3.2 billion purchase of the company.

The statements by Richard L. Bond, IBP president and chief operating officer, opened the trial in Delaware Chancery Court of IBP's suit to force Tyson to follow through on the agreement.

Bond said IBP's chairman, Robert L. Peterson, gave a strongly worded account of financial accounting problems at the subsidiary, DFG Foods in Chicago, to Tyson chairman John Tyson and other executives at a meeting in December, when Tyson was preparing an offer for IBP.

“It was something we didn't like talking about, but it was something that had to be said,” Bond testified. “It was a bad and ugly situation.”

Tyson, based in Springdale, Ark., announced on Jan. 2 a deal to buy IBP, of Dakota Dunes, S.D., for $3.2 billion and assume $1.5 billion in IBP debt. It called off the deal in late March, alleging that IBP had provided misleading information about the company's worth.

Tyson is the world's top poultry producer, and IBP is the largest hog processor. 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.

Vice Chancellor Leo E. Strine is hearing the trial, at which both Peterson and John Tyson are expected to testify. Peterson was in the courtroom Monday but declined to comment.

Experts in mergers and acquisitions say the case is unusual because of the claims by Tyson that IBP fraudulently induced the transaction. “There are some explosive facts in the case,” said Charles M. Elson, director of the Center for Corporate Governance at the University of Delaware.

Tyson, which had been forced to raise its bid because of a competing offer from Smithfield Foods Inc., called off the deal in a letter to Peterson on March 29. It said it had only learned of a Securities and Exchange Commission investigation into the DFG subsidiary on Jan. 10, several days after reaching the deal.

DFG, a small canape, kosher foods and appetizer company, has $66 million in annual sales -- less than 1% of IBP's total sales. IBP said its own investigation has found that the unit had faked invoices, overstated inventories and listed non-collectible items as receivables.

During meetings in March on blending the two companies' operations, John Tyson's father, senior chairman Don Tyson, began expressing concern about servicing the debt incurred by the merger, Bond said during his testimony.

“He was very concerned because the chicken business was not doing very well,” said Bond.

According to Bond, the two discussed DFG, and Don Tyson said he couldn't understand how such a small portion of IBP could create a problem of such magnitude. While Bond contended DFG could be salvaged, he said Don Tyson's advice was to “blow the whole thing up and write it off.”

At another March meeting, Don Tyson again voiced concerns about paying for the transaction, according to Bond, who said he promised that IBP's performance would turn around after Easter.

“I remember specifically saying, 'Don, I want you to be comfortable.' His parting comment was 'I feel comfortable and I'm going fishing,' “ Bond said.

In court filings, Tyson said it was tricked into overpaying for IBP. It maintains the beef and pork company will be “unjustly enriched” if it is permitted to keep the $66.5 million breakup fee advanced by Tyson.

IBP shares have tumbled since Tyson backed out of the deal. In trading Monday, shares were up 7 cents to close at $17.17 on the New York Stock Exchange, well below the $30 a share Tyson offered.

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