Smithfield Foods, the nation's top pork producer, will buy Premium Standard Farms, the second largest pork producer, for $810 million, including about $117 million in debt.

 Smithfield plans to honor all PSF hog production contracts, and that its facilities will remain open and in operation at least at current productions levels. Smithfield also remains committed to purchasing significant numbers of hogs on the open market.

"This is a business we know very well and it relates directly to our core competence," says C. Larry Pope, Smithfield's president and chief executive, said in a statement. "Strategically, this is a very good long-term fit and near- term, this combination should generate benefits for both organizations and our customers."

Under the terms of the deal, each share of Premium Standard will be converted into the right to receive 0.678 Smithfield shares plus $1.25 in cash. Smithfield gave the combined value of stock and cash as $21.35, based on Smithfield's average closing price on the New York Stock Exchange over the most recent 10-day trading period.

John M. Meyer, PSF's president and chief executive officer, states, "Our agreement to merge with Smithfield enables PSF's shareholders to receive an immediate premium for their shares and continue to participate in the growth of Smithfield, a well-capitalized company with one of the best records of creating long-term shareholder returns of any company in any industry. As part of Smithfield, we will continue to execute our strategy and provide attractive opportunities for our employees, our customers, our pork producers and the communities in which we live and work."

The deal would increase Smithfield's pork-processing marketshare to 31 percent from 26 percent and increase its pork production share to 19 percent from 14 percent.

ContiGroup Companies, which owns 38.8 percent of Premium Standard's stock, agreed to support the deal.

The company plans to close the deal in the first quarter of 2007, but there could be a few roadblocks. RonPlain, agricultural economist at the University of Missouri, says that the U.S. Justice Department will probably have a lot of questions. One sticking point may be that Smithfield and PSF are the only two major hog buyers in the Southeastern United States.

Plain says it’s logical for Smithfield to expand, and it may put pressure on other players in the industry to see if they need to get bigger to stay visible.

Source: Smithfield news release