Smithfield Pork Merger Approved
Last updated Monday, May 7, 2007 8:45 PM CDT in Business
By Kim Souza
The Morning News
Smithfield Foods got the green light Monday to increase its market share when the Department of Justice approved Smithfield's $810 million acquisition of Kansas City, Mo.-based Premium Standard Farms.
The deal will boost Smithfield's pork processing market share from 26 percent to 31 percent -- pushing it even further ahead of Springdale-based Tyson Foods Inc. and its 18 percent of the pork processing market share.
Monday's decision was considered a major victory for the Smithfield, Va.-based pork king because of antitrust concerns.
Wall Street investors approved of the news as Smithfield shares burst through the 52 week high before closing at $31.49.
"Surprisingly, Smithfield was not forced to sell off any of Premium Standard Farms' assets. This is good because a forced sell would have put downward pressure on the sales price of those assets," said Farha Aslam, industry analyst with Stephens Inc. (Stephens Inc. performs investment banking services for Smithfield Foods and is compensated accordingly.)
Monday's approval is a winning situation for Smithfield because had the deal been disallowed, Smithfield would have likely be required to pay a $100 million penalty to Premium Standard, Aslam said.
The deal was investigated by the Department of Justice's antitrust division, which began its inquiry in November.
Hog farmers had feared the merger would hamper competition and depress live swine prices paid by processors to the hog farmers.
"Based on evidence obtained during its extensive investigation, the division found that the merged firm would continue to face significant competition in the sale of fresh and processed pork from its national competitors," the department said in a news release. "Additionally, farmers who sell hogs or hog-raising services to the merged firm would have competitive alternatives that would deter the merged firm from lowering prices paid to the farmers."
Under terms of the deal announced in September, Smithfield will buy Premium Standard for about $674 million in cash and stock and will assume about $117 million of Premium Standard's debt.
The merger will increase Smithfield's vertical integration to 62 percent from 56 percent -- which means the company owns and/or controls all aspects of the process from which it derives 62 percent of its sales.
Under the approved merger, the company will have the capacity to grow roughly 18 million hogs and process 30 million annually.
Smithfield is the largest hog grower and pork processor in the United States, with annual revenue of more than $11 billion.
Premium Standard is the second-largest hog grower and sixth-largest pork processor with annual revenues of about $900 million.
Springdale-based Tyson Foods ranks second to Smithfield with pork sales of $3 billion in 2006, but the company grows less than 1 percent of the pork it processes.
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