September 19, 2006

 

Smithfield to buy Premium Standard Farms

 

 

Smithfield Foods Inc, speeding the consolidation of the meat industry, agreed to buy no. 2 US hog-farm operator Premium Standard Farms Inc for US$652 million in stock and cash.

 

The move by the biggest US pork slaughterer, which economists expect to trigger questions by antitrust regulators, reflects an increasing trend by big meat companies to vertically integrate, or kill their own livestock instead of buying from independent farmers.

 

While farm groups and farm-state legislators are resisting the rise of packer-owned herds, meatpackers favour the strategy as a shield from volatile commodity prices. The US poultry industry has been vertically integrated for decades.

 

"We believe that the person who owns the hogs is the person who will survive in the pork industry," said C. Larry Pope, Smithfield's chief executive and president. "The pork industry is headed in the same direction as the poultry industry."

 

Under terms approved by the directors of Smithfield and Premium Standard, based in Kansas City, Misssouri, each Premium Standard share would be converted into 0.678 Smithfield share plus US$1.25 in cash. Smithfield, based in Smithfield, Virginia, would assume US$117 million of Premium Standard debt.

 

ContiGroup, a closely held agribusiness giant based in Manhattan that owns a 38.8 percent stake in Premium Standard, would receive a 6.5 percent stake in Smithfield through the deal, making it one of Smithfield's largest holders.

 

A pioneer of vertical integration, Premium Standard slaughters about 4.5 million of its own hogs annually. Through the combination, Smithfield will be able to produce 54 percent of the pigs it slaughters.

 

While the combination is not likely to increase food costs for consumers soon, several economists and some farm industry officials said that the deal should attract the attention of antitrust regulators because of the additional market control it gives Smithfield, which already raises and slaughters more hogs than any other US company.

 

If the deal goes through, Smithfield would own nearly 20 percent of the nation's pigs and control 31 percent of the nation's pork-slaughtering capacity.

 

"I think there could be an antitrust issue," said Steve Meyer, president of Paragon Economics in Des Moines, Iowa.

 

Among other things, Smithfield would solidify its dominance of the East Coast market by adding Premium Standard's Clinton, North Carolina, plant to its lineup. Mr. Pope said he is optimistic the deal will pass antitrust scrutiny because competition for hogs on the East Coast is so fierce that the company recently closed a plant there.