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Tyson drops on IBP talks
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June 18, 2001: 3:45 p.m. ET
Poultry and beef producers resume talks on $3.2B merger at court order
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NEW YORK (CNNfn) - Shares of Tyson Foods Inc. plummeted more than 18 percent Monday after a court order forced the No. 1 U.S. poultry producer to renew its $3.2 billion merger negotiations with IBP Inc.
Springdale, Ark.-based Tyson (TSN: down $2.06 to $9.32, Research, Estimates) does not expect to appeal a Delaware Chancery Court decision ordering it to honor its agreement to buy IBP. The two firms now are working toward a merger based on original financial terms.
Tyson had a "positive and productive meeting" Sunday with IBP, and both companies are trying to merge on terms identical to those in its previous agreement, Tyson said.
While Tyson stock dropped, news of the negotiations had a positive effect on shares of Dakota Dunes, S.D.-based IBP (IBP: up $5.98 to $24.25, Research, Estimates), which surged more than 32 percent in afternoon trading.
Tyson tried in March to back out of a deal to buy IBP, the No. 1 U.S. beef producer, for $30 a share, or $3.2 billion, citing numerous breaches of IBP's merger agreement, including alleged accounting irregularities at an IBP subsidiary.
But IBP sued to force the merger to proceed, and the Delaware Chancery Court ruled Friday that Tyson must meet its agreement to buy IBP. Tyson said it will not appeal the ruling.
"We are satisfied that IBP's accounting issues have been resolved, and have every confidence in (IBP's) management team," Tyson CEO John Tyson said. "We look forward to their contribution as we work together to run the world's premier protein provider."
Terms of the original merger agreement called 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 remainder. Tyson also will assume $1.5 billion in IBP debt, up slightly from its original projection of $1.4 billion.
Agreement this week?
The two sides have until June 27 to work out an agreement, but most analysts expect a merger announcement by Wednesday.
Analyst John McMillin of Prudential Securities Inc. analogized the months of conflict and court ordered coupling to a Hollywood wedding. Tyson still could get out of buying IBP, but walking away would open it up to more risks.
"We hope this works out better than a Hollywood wedding," he said.
Tyson's options were very limited, analysts said Monday. If it walks away from the IBP purchase, Tyson could have to pony up as much as $2 billion in breakup fees, analysts said.
When Tyson agreed in January to buy IBP, it beat out a rival bid from No. 1 pork processor Smithfield Foods Inc. IBP chose Tyson because a merger with Smithfield (SFD: up $0.12 to $37.50, Research, Estimates), which has nearly 40 percent of the pork industry, would have created antitrust issues, analyst Berry Summerour of Stephens Inc. said.
IBP shares have been rocked by the high profile court battle, hitting a high of $29.31 in January once the Tyson merger details were set and then plummeting in April to $14.50 after it backed out of its purchase agreement.
"Tyson could try to settle with IBP for some sort of breakup fee, which could be staggeringly large," Summerour said. "Or they could just buy IBP and in return get $17 billion to $18 billion in revenue."
IBP, a supplier of fresh beef and pork products, earned $19.2 million on $4.2 billion sales for the quarter ended March 31. IBP also makes consumer ready foods such as pizza toppings, deli meats and soups and sauces.
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Tyson, whose customers include McDonalds and KFC, could leverage its strong brand recognition with an IBP purchase to create a leading marketer of beef, chicken and pork, Summerour said. He maintained a Buy rating on Tyson stock with a 12-month price target of $16.
"Tyson would control a nearly $3 billion branded prepared food business," Summerour said.
However, analyst George Dahlman, of U.S. Bancorp Piper Jaffrey, thinks Tyson has taken on too much with IBP. Tyson's strategy for IBP will take several years that will not show near term progress.
"This is not something Wall Street will have the patience for," Dahlman said. "We were quite adamant from day one that we didn't they belonged together. They are successful with chicken but will now have to do it with pork and beef."
Without IBP, Dahlman had a $17 buy rating for Tyson stock. With IBP he has a neutral rating for Tyson and a $9.66 price target for the stock. 
-- from staff and wire reports
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