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News > Deals
IBP gets rival $2.6B bid
November 13, 2000: 5:50 p.m. ET

Smithfield all-stock offer tops earlier $2.4 billion bid from IBP management
By Staff Writer Tom Johnson
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NEW YORK (CNNfn) - Smithfield Foods Inc. confirmed Monday it has made an unsolicited offer to acquire IBP Inc. for $2.6 billion in stock, topping a $2.4 billion management-led buyout bid already agreed to by the No. 1 U.S. meatpacking company just six weeks ago.

The proposed union would create an unparalleled leader in the U.S. meat-processing industry, packaging nearly a third of the pork and beef processed in the United States in addition to a substantial presence worldwide.

In a letter sent to a special committee advising IBP, Smithfield Foods (SFD: Research, Estimates) offered to pay $25 a share in stock to acquire the Dakota Dunes, S.D.-based company. Smithfield, already IBP's second-largest shareholder, with a 6.6 percent stake, would also assume $1.4 billion in debt.

The bid represents a 19.8 percent premium over IBP's closing price of $20.88 Friday and a 12.4 percent premium above the $22.25 per share IBP's management and a buyout group led by Donaldson, Lufkin & Jenrette agreed to pay last month.

In a conference call with analysts Monday, Smithfield Chairman and CEO Joseph Luter III said his company's offer was far more attractive than the competitive leveraged buyout offer on the strength of Smithfield's currency alone.

"We have great respect for the people of IBP," Joseph Luter III, Smithfield's chairman and chief executive, said during a conference call with analysts today. "The company is a low-cost, high-quality beef and pork processor.

"Where we differ is on how best to create value for shareholders and where to draw the line between the risks a company is willing to take upon itself and the risks it is willing to place upon the communities it's meant to serve."

graphicStill, investors didn't necessarily agree.

The Smithfield proposal is subject to a 10 percent collar from Smithfield's closing price of $31.62 Friday, which is designed to keep the acquisition valuation at $25 per share. For instance, if Smithfield's share price fell as low as $28.46 per share, the bottom of the collar, IBP shareholders would receive 0.878 Smithfield shares.

In trading Monday, Smithfield's stock closed below the collar at $28, down $3.62 for the day, pushing the deal's valuation below $25 per share valuation and shaving roughly $400 million off the transaction's enterprise value.

Analysts said despite the higher price tag, the Smithfield bid represented only a slightly better situation for IBP (IBP: Research, Estimates) shareholders because it was an all-stock bid as opposed to cash. Still, most were encouraged by the company's interest.

"I'm glad that there is a second bidder, but the second bid is not much better than the first," said John McMillin, an analyst with Prudential Securities.

"Given the risks related to closing the deal, they are probably pretty comparable," said Jaine Mehring, an analyst with Salomon Smith Barney. "A better situation, in my view, would have been $26 per share in cash on the table."

IBP said in a statement that it was reviewing the offer, but would not speculate on the outcome or make any additional comment at this time.

Third bidder unlikely

Luter sent a letter outlining the deal to the special committee Sunday evening. In it, he touted the superior economic value of his company's offer and noted that unlike the management-led leveraged-buyout offer, his bid was not contingent on a financing condition.

"Many IBP shareholders have called into question the fairness of the buyout group's proposal," Luter said. "We sincerely hope and believe the special committee will, consistent with its fiduciary duty, review our proposal on the merits and, based on those merits, will promptly conclude that the best interest of their shareholders, and indeed all concerned, are best served by commencing discussions with us."

Analysts initially criticized the management-led buyout proposal, noting it was designed to help IBP, the world's largest producer of fresh beef, work through the nuances of its ongoing brand-refocus project as a private company.

Still, few expected the entry of a third bidder, or a richer bid from the management-led group, which is somewhat inhibited by a difficult fundraising environment in the high-yield debt market right now.

"There's plenty of room from the DLJ bid, which was a bargain, but there's also still room for another bid," said Andrew Wolf, an analyst with BB&T Capital Markets. "The problem with the DLJ bid is timing. The high-yield market is just shut down right now."

Archer-Daniels interest viewed as unlikely

Analysts said one potential third-party bidder might be Archer-Daniels Midland Co. (ADM: Research, Estimates), currently IBP's largest shareholder with a 12 percent stake, although the crop-processing company would be able to garner few of the financial synergies Smithfield would.

IBP has ventured into packaged meat products and prepared foods in recent years to help guard against price swings in the meat market. A takeover by Smithfield, the nation's leading pork producer, would help better compete with companies like ConAgra Foods Inc. (CAG: Research, Estimates) and Cargill Inc., analysts said.

Smithfield does not expect the purchase to encounter any meaningful antitrust or other regulatory obstacles but said the transaction may include selling certain assets.

The combined company would save about $200 million a year in costs, and Smithfield does not expect a significant number of job cuts. The purchase would add to earnings in the first year, Smithfield said. The company would also look to divest some of IBP's pork-processing operations, probably two plants in all.

IBP announced Nov. 7 that it had discovered certain inaccuracies in the financial statements of one of its units, DFG Foods, causing it to restate recent results for the overall company.

As a result of overstated inventory value, IBP made a $9 million reduction in pre-tax earnings from the amount previously announced. The move reduced earnings for the quarter to $78.4 million, or 73 cents a share, down from the $83.9 million, or 79 cents a share, originally reported. Year-to-date earnings were reduced to $198 million, or $1.82 a diluted share, from the $203 million, or $1.88 a share, originally reported. graphic

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