Processing Magazine

Meatpacker Buys 2 US Rivals

March 7, 2008
A Brazilian meatpacker''s $1.1 billion bid to buy two large U.S. rivals lifted shares in other meat producers recently as investors viewed the deals as a way to give the industry some pricing leverage as it battles high feed costs and stagnant herd sizes.

JBS SA''s offers to buy Smithfield Beef Group Inc. and National Beef Packing Co. LLC would, if finalized, make the Sao Paulo-based company the nation''s largest beef packing company -- a move expected to draw close regulatory scrutiny in the U.S., particularly in a time of rising concern about food prices and safety.

Most analysts said the deals were positive moves for the beef product industry, which also is struggling to regain full access to the export markets after scares stemming from mad cow disease.

JBS SA entered the U.S. market last year by spending $225 million to acquire Greeley, Colo.-based Swift Foods & Co.

It said Wednesday it will spend $565 million to acquire Smithfield Beef Group Inc., the nation''s fifth-largest beef producer, from its parent Smithfield Foods Inc. of Smithfield, Va.

The sale includes 100 percent of Five Rivers Ranch Cattle Feeding LLC, which is half owned by Smithfield Beef and half by Continental Grain Co. Immediately before the JBS sale closes, Smithfield Beef will acquire the remaining 50 percent interest in Five Rivers in exchange for 2.167 million shares of Smithfield stock.

The sale will enable Smithfield to focus on its core pork processing business, said BMO Capital Markets analyst Kenneth Zaslow. He said in a client note that he approved of the deal but the $565 million price was higher than he expected.

The announcement came a day after JBS said it would acquire No. 4 National Beef Packing Co. LLS in a $560 million stock-and-cash deal. JBS also agreed to buy Tasman Group in Australia for $100 million and pay an existing debt of $50 million in Tasman''s name.

JBS will buy Kansas City-based National Beef for $465 million in cash, $95 million in stock and assume net debt of $410 million.

JBS, a privately held company with publicly traded debt, had $11.9 billion in revenue in 2007 with operations in Brazil, Argentina, the United States and Australia. Now it plans to turn its focus toward consolidation and making progress with cost-savings as a result of the acquisitions. Batista said there no plans for layoffs.

National Beef said its president, Tim Klein, will become president and chief operating officer of the joint National Beef/JBS-Swift beef operations.

The proposed consolidation, which will need regulatory approval, comes at a time when ranchers are struggling to maintain herds as they pay more for grain and other feed and as grasslands suffer because of persistent drought and competition for land with urban developers.

Today, there are more processing facilities and more space available in the plants than there are cattle, said Jay Truitt, a vice president of the Denver-based National Cattlemen''s Beef Association.

Ranchers are paying "more money for head than at any time since we''ve started tracking those numbers," he said.

Tyson Foods Inc., the world''s largest meat producer, already plans to close one of its processing facilities in Kansas, saying it has an overcapacity to process cattle.

Herds have remained stable at around 34 million fed cattle, the animals which are the source of the bulk of consumer products. "The more relevant factor is we should be growing," Truitt said.

At the same time, meatpacking plants have been coping with higher commodity prices for grain in animal feed and a troubled export market that only recently has begun to reopen to U.S. beef after the mad cow scares.

Shares of Smithfield rose $1.07, or 3.8 percent, to $28.95, while Tyson rose $1.27, or 8.5 percent, to $16.19.

Shares of chicken producer Sanderson Farms Inc. rose $2.00, or 5.7 percent, to $36.94 and shares of its larger rival Pilgrim''s Pride Corp. added $1.42, or 6.2 percent, to $24.23.

National Beef has operations in Liberal, Kansas City, and Dodge City, Kan.; Brawley, Calif.; Hummels Wharf, Pa.; and Moultrie, Ga. The company had $5.6 billion in sales last year and processed almost 4 million head of cattle.

Smithfield Beef, which has major facilities in Green Bay, Wis.; Tolleson, Ariz.; Plainwell, Mich.; and Souderton, Pa., processes more than 2 million head of cattle a year and its sales exceed $2.5 billion annually.