Few events could have grabbed attention from the shaky U.S. Presidential election this fall, but Smithfield Food's bid to purchase IBP did the trick – at least in the pork industry.
Still, it should have come as no surprise that the Virginia-based pork producer/packer would counter the weak bid by an investment group made earlier this fall.
Smithfield's $4.1-billion offer came in the form of a tax-free merger in which IBP shareholders would receive $25 per share in Smithfield Foods' common stock. That amounts to a 12.4 percent premium over the first offer.
IBP's Special Committee has agreed to sit down and talk with the No. 1 pork packer. IBP is currently the No. 2 pork packer, and ranks No. 1 in the beef market, with a 60 percent share. In total, IBP is the United States' No. 1 meatpacker with $14.1 billion in annual sales. Smithfield's annual sales total $5.2 billion.
So is the IBP purchase one more piece in Joe Luter's,Smithfield's chief executive officer, quest to be "King of the (pork) World"?
Perhaps to a degree, but there is more to it.
On this page in the July issue of Pork I talked about how "retailers are driving change" in the pork industry. I said that: "Case-ready pork is the most significant example of retailers' influence." I pointed out that consolidation is sweeping through the retail grocery industry and the impact will eventually trickle down to the farm. Because fewer retailers control more of the market, they can dictate what they want. One thing they don't want is to deal with a hoard of suppliers.
Those are the same factors influencing Smithfield's proposed purchase of IBP. Smithfield doesn't have any beef products so it lags Farmland, Cargill's Excel Corp. and ConAgra in terms of being able to provide beef and pork products. With IBP in its arsenal, Smithfield would leap frog into the beef market's top spot. It will then be a legitimate one-stop shop for consumer-ready beef and pork products. So, the added hog slaughter capacity is a bonus.
Wal-Mart, which will soon be the nation's No. 1 grocer, will like the fact that Smithfield can provide both products. The retailer has announced that it will eliminate all meat cutters and sell only consumer-ready products. Smithfield signed a pork supply contract with Wal-Mart earlier this year. But the retailer tends to sign short-term contracts so it can keep suppliers on their toes.
Smithfield has a well-established, but mostly regional branded pork product line. IBP was in the midst of launching a beef and pork brand on a national basis. So, this purchase could launch Smithfield's pork brand onto the national scene as well add beef to its repertoire.
The all-important question is whether the Smithfield/IBP sale will hit any regulatory snags.
Luter confidently says "no". But others aren't so sure. USDA Secretary Dan Glickman wants the U.S. Justice Department to thoroughly investigate the proposal's potential impact. Several U.S. senators have fought against previous ag consolidation and will take aim at this one.
University of Missouri agricultural economist, Ron Plain, says approval seems unlikely – largely because IBP accounts for 18 percent of total U.S. hog slaughter, while Smithfield has 20 percent.
Still, IBP controlled a huge share of the beef market. The difference, however, is timing. There is a growing concern that a few big food companies already wield too much power over farmers and the food supply.
Luter says he will sell whatever assets he must in order to appease regulators and complete the sale. That most likely means a couple of Midwest pork plants. With market hog numbers on schedule to pressure slaughter capacity next fall, any plant closings would be bad for prices.
He also says Smithfield won't get into the cattle feedlot business, nor will it expand further into vertically integrated pork production.
Yeah maybe. What the packer will do is dictate the terms and conditions – market and production – of the hogs it buys. But then, all packers are heading down that road.
How this issue will shake out, at least for now, is "too close to call."