010539 IBP Says Tyson Played Chicken In Calling Off Merger

Wilmington, DE - Tyson Foods Inc chickened out of a $3.2 billion deal to buy meat packer IBP Inc. because of an industry downturn and later found a convenient excuse to ax the deal, IBP executives suggested in court this week.

IBP's allegations come as part of a landmark court case in Delaware Chancery Court, where a judge must determine if Tyson's decision to break off the merger should stand. IBP is taking the rare step of asking a court to force Tyson to honor its commitment to purchase the company, while Tyson is seeking financial damages from its spurned target.

At the heart of the dispute is the material adverse change provision, included in almost every merger agreement, including Tyson and IBP's. The clause gives parties the right to call off a deal if they uncover material information that changes the strategic or financial reasons behind the transaction.

Tyson exercised the clause in late March when it terminated plans to acquire IBP, citing numerous breaches of the firms' merger agreement.

Through two days of testimony, IBP executives have tried to frame their case around two December meetings when the Dakota Dunes, S.D.-based company claims it fully disclosed potential financial troubles related to accounting irregularities at its DFG Foods unit.

Instead, IBP executives are suggesting Tyson officials simply became nervous about deteriorating earnings at both companies during the first quarter and simply used the problems at DFG, a Chicago-based maker of high-end hors d'oeuvers, as an excuse to call off the deal.

Tyson, which won't call its first witnesses until next week, counters that it was effectively lured into the Jan. 1, 2001 merger agreement under false pretense because IBP did not reveal the true extent of DFG's financial problems. Those troubles ultimately forced IBP in March to restate seven quarters of financial results and take a $60.4 million asset impairment charge.

Tyson lawyers tersely questioned IBP President Richard Bond Tuesday about a Dec. 8, 2000 due diligence meeting between the two companies, during which Bond insisted Tyson was told in “vehement” terms about the worsening DFG situation.

IBP Chairman and Chief Executive Robert Peterson, who has not testified yet, said in his deposition that he used terms like “black hole” at that meeting to define DFG's financial situation and said he wanted to “hang the son of a bitch” responsible for the problems.

Bond, who said he could not remember Peterson's exact words but did recall the impassioned tone of his talk, said he would be surprised to learn, as Tyson's lead lawyer Anthony Clark of Skadden, Arps suggested, that Tyson officials had no notes about such terminology being used at that meeting.

Bond had said previously that Tyson officials were told at that Dec. 8 meeting that the write-offs related to DFG could reach “$20 million to $25 million or more” beyond the $9 million charge already taken.

That story was corroborated by IBP Chief Financial Officer Larry Shipley, who testified Tuesday that he personally provided similarly grave forecasts for DFG to Tyson officials on a Dec. 29 conference call three days before the merger agreement was signed.

“I told them that even though we had made a lot of progress, people were still in there and still talking,” Shipley said, noting he told Tyson officials at that point the write-off for DFG was going to be in the $30 million to $35 million range “or more.”

Complicating the matter is a Dec. 29 U.S. Securities and Exchange Commission inquiry that partially related to the DFG troubles. That inquiry was faxed to an IBP attorney that day, but not discovered by IBP executives until Jan. 8 and not disclosed to Tyson until Jan. 10.

While Bond and Shipley both testified they worked closely with the SEC and kept Tyson informed about the worsening DFG situation during the subsequent months, merger attorneys have suggested that the SEC letter's Dec. 29 date could back up Tyson's claim that there was a material adverse change.

Still, IBP officials insist that the ultimate impact of the charges for DFG were minuscule since IBP generated nearly $17 billion in sales last year and earned $220 million before one-time charges.

Bond testified on Monday that Tyson Senior Chairman Don Tyson twice expressed concerns to him about the combined companies' ability to meet earnings targets post-merger even before IBP restated its earnings on March 13.

Bond said Tyson's fears were based on a substantial slowdown in chicken and cattle production during the first quarter, the result of a harsh winter.

Still, Tyson Foods and IBP discussed reducing the terms of their merger agreement as late as March 26, three days before Tyson terminated the deal, but remained far apart on a new price, Bond said.

While Bond argued that the DFG problems were worth a reduction of no more than $50 million off the previously-agreed to price, Tyson Chairman and Chief Executive John Tyson pushed for more of $200 million to $300 million reduction, Bond said.

That was the last time the two sides talked, although Bond insists the deal is still feasible.

“I still believe in the merger,” Bond said Monday. “I personally believe that it was a very good marriage. I still believe that I can work with the process and make it work.”

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