NEW YORK (CNNfn) - IBP Inc., the world's largest meat processor, is buying Corporate Brand Foods America, in a move to shift its business more to value-added food products.|
IBP will pay $584 million, including assumption of $323 million in debt, based on Monday's stock closing price. IBP will issue new stock for the transaction, expected to close in January. That will lead to a dilution of its earnings next year by 7 to 10 percent, but should add to earnings per share in 2001.
Still, Erika Grittman Long, analyst with J.P. Morgan, applauded the move.
"Clearly the dilution is not something we're a big fan of, but we think that IBP would have exceeded our expectations in the first half of next year, so it may still consensus estimates for 2000," she said. Analysts surveyed by First Call had been looking for earnings of $2.71 a diluted share in 2000 before this transaction was announced.
Long said the move toward more processed foods is important because it distances IBP from the commodity pricing cycle for its products. IBP slaughters about 38 percent of the beef and 17 percent of the pork in North America, she said. As recently as 1996, processed foods made up only 15 percent of IBP's sales. With this purchase that is projected to rise to 40 percent of sales and 50 percent of earnings before income tax, depreciation and amortization.
"I think it's an important milestone for IBP because it takes it over 50 percent (of profits from processed foods)," she said. " I think the big question is whether the market will recognize that its business structure has changed."
IBP (IBP), based in Dakota Dunes, S.D., had net income of $231.7 million, or $2.51 a diluted share, in the 39 weeks ended Sept. 25. Sales during the period were $10.2 billion A year earlier, income excluding extraordinary items was $113 million, or $1.22 a share, on sales of $9.8 billion.
Privately held, Houston-based CBFA should have sales of $800 million in 1999, IBP said.
"CBFA will give us the necessary critical mass to broaden and deepen our penetration of the retail supermarket, club store and foodservice channels," said Robert Peterson, chairman and CEO of IBP. "The completion of the transaction will enable us to accelerate the realignment of our existing production facilities. Not only will this transaction not result in layoffs and plant closings, we expect to increase our production capacity and manpower."
IBP's stock closed Monday at 18-15/16, up 3/16.