010562 Despite Red Flag, Tyson Moved on IBP

Wilmington, DE - Top executives at Tyson Foods Inc. knew fraud had been committed at one of IBP Inc.'s subsidiaries before it made a $3.2 billion offer for the giant meatpacker, Tyson's chief financial officer said.

And John H. Tyson, chairman of Tyson Foods, said he was asked by financier George Gillette to be a “white knight” and rescue IBP from an acquisition by Smithfield, Va.-based Smithfield Foods.

In his testimony, which came in the last 15 minutes of the day's session, Tyson said he told Gillette: “I'll sleep on it.”

Tyson was in the courtroom for the first time since the trial began May 14. He took the stand for the last 15 minutes of the day. He is expected to return to the stand Thursday when the trial reconvenes after a one-day break.

Tyson CFO Steven Hankins, who was on the stand most of the day in Delaware Chancery Court, said that both he and Tyson knew in December that there were “red flags” about IBP's DFG Foods subsidiary.

Hankins said Tyson had reached the conclusion that the meatpacker's food brands business, which included DFG, was “broken.”

Yet, Hankins said, the company moved forward with its offer for the Dakota Dunes, S.D.-based IBP.

Tyson Foods was to pay $30 per share in cash and stock and assume $1.5 billion in IBP debt. Tyson called off the deal in March, however, saying IBP failed to notify it of a federal accounting probe involving the meatpacker's canape and appetizer subsidiary, DFG Foods.

IBP claims Springdale, Ark.-based Tyson backed out because it got cold feet and is suing to try to force Tyson to complete its purchase of IBP as promised.

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

Hankins testified Tuesday that in February Tyson's father, chairman Don Tyson, who controls more than 90% of the Springdale, Ark.-based company, asked company executives at a meeting for their thoughts on mad cow disease.

In a meeting a month later, Hankins said, Don Tyson expressed concern about IBP not meeting its financial projections.

Hankins testified that Don Tyson said he felt “the best thing to do was to find a way to withdraw” from the IBP merger.

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.

Shares of IBP were up a penny to close at $17.81 in trading Tuesday on the New York Stock Exchange, while shares of Tyson were down 5 cents to close at $13.30.

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