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Market burps at meat deal
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January 2, 2001: 5:11 p.m. ET
Tyson shares off 7% as investors have trouble digesting $3.1B IBP takeover
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NEW YORK (CNNfn) - Investors reacted warily Tuesday to the first big merger of 2001, sending shares of Tyson Foods Inc. down more than 7 percent after the poultry processor agreed to purchase meatpacker IBP Inc. for $3.1 billion in cash and stock.
Tyson (TSN: Research, Estimates) shares fell 94 cents to close at $11.81, rebounding slightly from the day's low of $11.31. Still, the fall was enough to shave more than $100 million off the deal's valuation, as investors struggled to digest the merger's projected earnings synergies.
"People see a changed company," said John McMillin, an analyst with Prudential Securities. "It's one of those situations where change increases the risk of the company. Now that they have diversity, you have greater growth potential, but you also have concern as they get into new businesses."
The agreement, signed Monday, creates a dominant U.S. meat and poultry processing concern with annual sales in excess of $23 billion.
The transaction values IBP (IBP: Research, Estimates) at $30 per share and is $4 per share higher than Tyson's original bid, made in early December. The deal came after an intense bidding war over the holiday weekend between Tyson and Smithfield Foods, the No. 1 U.S. pork processor.
Tyson officials said the combination will enable the company to better position itself in an increasingly competitive and consolidating food service industry.
"We will have the ability to take advantage of our strengths to service the consolidating food service marketplace," said John Tyson, Tyson's chairman, president and CEO, on a conference call with investors and analysts Tuesday. "We can take and match our efficiencies and our services to meet a changing landscape."
Immediately accretive
Tyson officials said the transaction would immediately add to earnings by more than 15 percent after the deal's closing, expected sometime in mid-February. Steve Hankins, Tyson's chief financial officer, said the merger would increase earnings by even more during the following few years, but declined to offer specifics.
That helped draw a ratings upgrade Tuesday from Merrill Lynch analyst Leonard Teitlebaum, who raised the Springdale, Ark.-based company to an intermediate-term accumulate/long-term buy rating and said, based on the earnings projections, the company's stock should be trading closer to $17 per share.
Separately, Tyson also announced that it expected its fiscal first-quarter results for the period ended Dec. 31 to be "at the upper end" of the 7 cents to 12 cents per share range it had previously announced. The company also said it was reiterating its 8 cents to 12 cents per share guidance for its fiscal second quarter.
Click here to Prudential Securities analyst Jeff Kanter's take on the merger
Investors were far more cautious, however. Even IBP received only a mild bump Tuesday trading, climbing $1.25 to close at $28 while Tyson's shares continued to search for solid footing. Analysts blamed the decrease on concerns that the projected earnings gains might not withstand a downturn in the cattle cycle and fears of possible regulatory attempts to block the deal.
McMillin, who downgraded IBP's stock Tuesday to a Hold, noted IBP's fourth quarter ended Dec. 31 will probably be weaker than some expect -- the company is expected to earn 64 cents per share compared with a profit of $1 a share a year earlier -- because of a cyclical downturn in the industry.
John Tyson said he was not particularly concerned about the market's short-term reaction, saying it was more important to secure the company's long-term future.
 "I wasn't worried about our stock price going up in the short term because the fundamentals of our poultry business is in good shape," the chairman told investors and analysts on the call. "But three to five years from now, you guys were going to be asking what are you going to do next?"
Terms of the merger agreement call for Tyson to pay $30 per share cash for 50.1 percent of IBP's outstanding shares and the equivalent of $30 per share in stock for the remaining stake. Tyson will also assume $1.5 billion in IBP debt, up slightly from its original $1.4 billion projection.
However, the stock portion of the transaction is subject to a price protection "collar" that guarantees IBP shareholders will receive the $30 per share equivalent in stock only if Tyson's shares trade in a range of $12.60 to $15.40 per share.
If the average closing price of Tyson's stock in the 15 days prior to the deal's closing is below that range -- as it was Tuesday -- the valuation of IBP's shares would fall accordingly.
Still, the offer represents a significant premium for IBP, which first agreed to a $22.25 per share cash buyout bid from a management-led group backed by Donaldson Lufkin & Jenrette's merchant banking division in early October.
Smithfield bows out
A special committee reviewing offers for Dakota Dunes, S.D.-based IBP on Saturday chose the Tyson proposal, which offered a split payment of cash and stock, over Smithfield's, which offered $32 per share in cash for the world's largest processor of fresh beef and pork.
Smithfield released a statement Monday evening indicating it would drop its pursuit of the agreement in light of the definite merger agreement, but remained adamant that IBP had made the wrong choice.
"We are confident that over the next 12 months and beyond the IBP shareholders will, in hindsight, conclude that our offer would have created superior value," the company said.
But while Smithfield may have been able to wring more efficiencies from the transaction, given both companies' interest in pork, analysts were uneasy with how the combination would be received in Washington, where various farming interest groups already were clamoring for regulatory officials to stop such a merger.
Smithfield (SFD: Research, Estimates) shares rose $2.07 to close at $32.47 Tuesday.
Some analysts have expressed concern that the Tyson proposal could meet similarly tough regulatory scrutiny, but Tyson said the mandated Hart-Scott Rodino Antitrust review was thus far proceeding smoothly -- with no apparent deal-breaking concerns having been raised.
Tyson said the company anticipates adopting successful refrigerated food distribution and case-ready strategies following the merger. He said although they are under no contractual agreements to do so of yet, that he anticipated IBP Chairman Robert Peterson and President Richard Bond were going to remain with the company through the transition period. 
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