The world's largest poultry producer and processor, Tyson Foods, sent forth a US$4.2bn battle cry yesterday (4 December), with an offer that prompted a large scale bidding war for US meatpacking business IBP. "We now have a full auction under way," commented Paul Korngiebel from Brandes Investment Partners, one of IBP's biggest shareholders, and the tussle is generating some interesting speculation.

Last year, Dakota Dunes-based IBP grossed revenue of US$14.08bn and is currently ranked as the leading US beef processor and second largest pork processor. The battle was first triggered by an early October private cash offer of US$2.4bn, or US$22.25 a share, from a consortium of IBP management, the US investment banking firm Donaldson Lufkin & Jenrette and grain processor Archer-Daniels-Midland Co. Now, however, some analysts have valued the company at as much as US$30 a share, and the bids are being pushed upwards.

There has been a huge surge recently of consolidation within the food industry, the push for globalisation proving irresistible for companies wishing to generate savings from shared distribution systems and create an international brand that sells for premium prices.  

Smithfield Foods considers whether to up the bid

This latest offer has trumped Smithfield Foods' all stock bid, received on 12 November, which amounted to US$27bn, or US$25 per share. The Virginia-based hog producer is remaining optimistic however, and said yesterday that it would continue with its due diligence of IBP, with CEO Joseph W. Luter III currently considering whether to up its proposed bid.

In a statement the company insisted: "It is by no means clear that the proposal Tyson made today represents superior long-term value over ours."

Smithfield first expressed its interest in a merger between the companies over a year ago, and argues that by combining the businesses it can generate annual savings of US$200m and control about a third of the US meat supply. 

Tyson angling to control the 'centre of the plate'

Meanwhile, Arkansas-based Tyson is desperately angling to become the nation's largest meat company and commented that its cash and shares bid, which values IBP at US$2.8bn and sees the assumption of US$1.4bn debt, "is superior by any measure" to the two previous offers.

It has been a long-term goal for the company to control the majority of the meat sold through restaurants and stores in the US, what it calls the "centre of the plate." Tyson made unsuccessful forays into the beef/pork industries during the early 1990s before renewing its pledge to "focus on feathers." However, Tyson now feels that it is in a position to do better.

IBP is, however, nearly twice the size of Tyson, which generated revenue of US$7.6bn last year and produces a quarter of the US's processed chickens. The company's marketing officer John Lea revealed that "chicken will be the most rapidly growing protein. But there are big opportunities in beef and pork." It believes it can revolutionise red meat in the same way it drove sales of chicken, by improving quality and uniformity, setting farming specifications and getting more value out of meat products.

Both offers have elicited controversy

Despite the fact that Tyson is confident that the cash component of its offer "adds certainty versus Smithfield's all-equity proposal," it is by no means clear-cut that this latest bid will be the last. However, while both offers have already elicited controversy, Tyson's does look the more secure.

Officials from USDA have demanded an antitrust review of the Smithfield bid following complaints from independent hog producers and Midwest politicians alarmed by a concentration of agriculture that could see the resulting group controlling more than one third of the market. It is possible therefore that, if successful, Smithfield's offer would, as Tyson points out, "face significant regulatory hurdles" that could delay completion.

Tyson's offer has no such difficulties but some analysts believe that the lack of operational overlap may be a double-edged sword as Smithfield has far more potential for cost cutting and therefore can afford to raise its bid. Tyson has pointed to the possibility of some synergies, in marketing and production facilities for example, but while it has not spoken of any certain figures it does believe that the deal would prove "instantly accretive, even before any synergies."

Shareholder suits have been prompted by Tyson's bid, meanwhile, amid claims that IBP directors may be breaching their fiduciary duty to generate the best price.

Which would be better for IBP's shareholders?

In terms of the best deal for IBP's shareholders, analysts are suggesting that Tyson is currently superior in offering half of the payment in cash and the rest in shares that command higher earnings. For Smithfield, meanwhile, independent IBP directors have suggested that its offer needs revision if it will ever be accepted.

By now, of course, the two-month-old private investment deal is unlikely to come off. Analysts are sceptical that IBP could ever justify taking the lower bid, and it is unlikely that the consortium could find the ready cash to up its offer. Not such a bad thing, however, if it waits for IBP to sign a takeover deal elsewhere and then collects its break up fee of US$59m. 

Relations with IBP management may prove a deciding factor

Aside from the economics, relations with IBP management may prove a deciding factor in the acquisition deal. Tyson foods is confident that its bid will be successful following two weeks of what CEO John Tyson called "very nice conversations" with IBP executives. It was anxious to make the bid appear friendly and reiterated that the IBP management team would stay after the deal is completed. By contrast, Smithfield already has much red-meat talent management, and IBP executives stand to lose their jobs.

A committee of independent IBP directors have revealed that they will study Tyson's bid by the same criteria that Smithfield's was considered, but have refused to reveal anything further.