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IBP to consider rival bid
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November 14, 2000: 5:50 p.m. ET
Meat processor to discuss Smithfield's $25 a share offer, which tops DLJ's
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NEW YORK (CNNfn) - Meatpacker IBP Inc. agreed Tuesday to open merger negotiations with No. 1 U.S. pork processor Smithfield Foods Inc., but the two companies immediately reached a standoff on the likelihood that Smithfield would raise its original $2.6 billion bid.
In a letter sent late Monday to Smithfield Chairman Joseph Luter III, a special committee representing IBP's board said it is prepared to hold discussions with Smithfield Foods (SFD: Research, Estimates) regarding the merger proposal made on Sunday.
Smithfield's $25-a-share all-stock offer for IBP trumped a $2.4 billion cash bid, at $22.25 a share, received in early October by Rawhide Holdings Corp., a unit of private equity fund DLJ Merchant Banking Partners III, IBP management and Archer Daniels Midland Co.
The special committee said while it was "pleased" to receive the offer, it was seeking assurances that Smithfield was willing to address several aspects of the proposal, including the acquisition price and lingering antitrust issues.
The Smithfield offer is based on an exchange ratio designed to guarantee IBP shareholders stock worth $25 per share. However, the ratio is subject to a "collar" that limits the ratio if Smithfield's stock falls above or below a certain price.
 Smithfield's stock closed Tuesday at $27.75 per share, down 25 cents for the day, below the bottom range of $28.46 established by the collar. That means if the merger were to have closed Tuesday under the current proposal, IBP shareholders would have received only $24.37 per share based on the maximum exchange ratio of 0.878 of a Smithfield share.
In it's letter Monday, IBP noted the collar was set after Smithfield set its 52-week high of $31.75 Friday. Prior to that date, the company had largely traded at between $25 to $30 per share for the last several months.
"In light of these facts, as well as the general volatility of share prices in the current environment, we will be very interested in discussing with you ways to protect the value for IBP shareholders," the company said. "This, in addition to other things, should include starting from a base price higher than $25 per share."
But the early indication from Smithfield was it had no intention of budging on its offer terms.
"The short answer is no, we will not be increasing our bid," Smithfield Chairman Joseph Luter told Reuters in an interview Tuesday. Luter did not elaborate and a spokeswoman for the company said she could not confirm the quote.
Analysts expressed mixed reactions to Smithfield's bid Monday, on one hand expressing relief that IBP had attracted a second bidder since many had called IBP's offer too low, but on the other expressing disappointment at the structure of Smithfield's bid.
Combined, Smithfield and IBP would create an unparalleled powerhouse in the meat processing industry, controlling nearly one-third of the U.S. beef and pork processing markets.
"As you have acknowledged in your letter and public comments, there are a number of issues that need to be addressed in connection with your proposal," said IBP's special committee chairwoman Joann Smith in a letter to Smithfield Foods. "Nevertheless, the Special Committee has determined that your proposal meets the applicable threshold under IBP's merger agreement with Rawhide Holdings Corp. and is therefore prepared to enter into discussions with you regarding your proposal."
Smithfield Foods (SFD: Research, Estimates) would also assume $1.4 billion in debt.
Smithfield's bid for the Dakota Dunes, S.D.-based IBP represents a 19.8 percent premium over IBP's closing price of $20.88 Friday and a 12.4 percent premium above the offer received from DLJ.
Conditions
IBP (IBP: Research, Estimates) set out conditions Tuesday for the offer that includes preventing Smithfield from making an acquisition offer for IBP that isn't for the meat processor's entire shares. Smithfield, already IBP's second-largest shareholder with a 6.6 percent stake, must also not buy any more shares in IBP outside of its takeover bid.
IBP also hopes to address regulatory concerns regarding a merger. IBP has a 30 percent market share in the U.S. beef market and an 18 percent share of the pork market. Smithfield, meanwhile, has 20 percent of the U.S. pork market, said analyst Andrew Wolf, of BB&T Capital Markets.
Combined, the two firms would surpass the 30 percent cutoff point that is consistent with industry practices, Wolf said.
The deal faces opposition from Iowa's attorney general, Tom Miller, who put out a statement regarding the IBP-Smithfield proposed combination. "We are very concerned about Smithfield and IBP, the nation's No.1 and No. 2 pork processing companies," Miller said. "The proposed merger poses serious questions for pork producers and for consumers."
If IBP clinches a deal with Smithfield, the company would have to sell slaughter capacity in Iowa to appease state regulators, Wolf said.
The lower DLJ cash offer is also no longer considered in the running, Wolf said. "If IBP can get a superior offer, and get one of their concerns, they will probably take that one," he said.
Credit Suisse First Boston, which recently closed its $11.5 billion purchase of Donaldson Lufkin & Jenrette, declined to comment on Smithfield's bid. 
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