Smithfield Foods buys PSF

By Jennifer Bremer

Smithfield Foods Inc. announced Sept. 18 that they would purchase Premium Standard Farms for $810 million.

The buyout would include stocks, cash and the assumption of $117 million in Premium Standard Farms' debt.

Smithfield officials are excited about the merger and University of Missouri agriculture economist Glenn Grimes doesn't think the merger will have much impact on the pork industry.

"Premium Standard Farms wasn't buying very many hogs anyway," says Grimes. "The majority of owners of hogs are basically two companies now and that may lead to vertical integration by the other companies."

Grimes doubts that the merger will affect the current facilities that are run by Premium Standard Farms, such as the one in Milan, Mo.

"This is a large issue for politicians and an emotional one for producers," says Grimes. "Whenever emotions are brought into play, it is hard to be objective."

Many politicians have expressed concern over this proposed merger, which would give Smithfield Foods Inc. control of nearly one-third of the nation's pork slaughter.

Iowa U.S. Senators Charles Grassley and Tom Harkin both are concerned about anti-trust issues and if it would violate the current laws.

"The United States needs family farmers and independent producers to make the free and open market system work and expanded packer ownership of hogs, exclusive contracting and captive supply are all adversely impacting their ability to compete in the marketplace," says Grassley.

"I cannot fathom how Smithfield, which is the largest and fastest growing integrator can continue to be allowed to purchase hog operations across the country," Grassley says. "Over the last several years Smithfield has made it perfectly clear that it intended to purchase its competitors to assert its dominance in the pork industry. This is alarming. I expect the Justice Department to take a serious look at this merger."

Harkin says federal regulators should look into whether the merger would violate anti-trust laws and how the merger would impact pork producers, consumers and hog and pork markets. The ranking Democrat on the Senate Agriculture Committee, Harkin has focused on packer concentration issues and market control in the past.

"This merger causes a very substantial change in the structure, vertical integration and degree of consolidation in the U.S. pork industry," Harkin says. "It obviously will have significant impacts on both independent hog producers and those who raise hogs under contract."

Grassley says the announced merger means more legislation is needed against packer ownership.

Missouri U.S. Sen. Jim Talent, requested the Senate Judiciary Committee hold a hearing on the merger. Talent also sent letters to the Department of Justice and U.S. Secretary of Agriculture Mike Johanns asking that they closely scrutinize the deal. Like Harkin, Talent is a member of the Agriculture Committee.

Smithfield's president and CEO C. Larry Pope says they are excited about the combination of Premium Standard Farms and Smithfield. "This is a business we know very well and it relates directly to our core competence. We have strong expertise in both live hog production and in fresh pork processing. Strategically, this is a very good long-term fit and near-term, this combination should generate benefits for both organizations and our customers," Pope says.

The deal is expected to close in the first quarter of 2007, after which it is expected to be beneficial to Smithfield earnings.

Smithfield Foods is the leading processor and marketer of fresh pork and processed meats and the largest producer of hogs in the nation. Premium Standard Farms is the second-largest pork producer and sixth-largest pork processor.

The agreement enables PSF shareholders to receive an immediate premium for their shares, said John M. Meyer, president and CEO of PSF, based in Kansas City, Mo.

Smithfield will issue about 21.9 million shares in exchange for PSF shares. PSF has about 32 million shares outstanding.

All current PSF hog production contracts will be honored and Smithfield will remain committed to purchasing "significant" numbers of hogs on the open market, Smithfield said.

Smithfield added that PSF plants would remain open and operating at least at current production levels.

If the buyout goes through, Smithfield would control about 31 percent of the hog slaughter in the U.S., which is less than the 33 percent of cattle slaughter that Tyson currently controls.

Jennifer Bremer can be reached by phone at 641-938-2342 or by e-mail at jbremermaj@hotmail.com.

Date: 9/21/06

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