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Smithfield Foods outbids Cargill for purchase of FarmLand Industries pork assets

(Wednesday, Oct. 15, 2003 -- CropChoice news) -- Richard Gibson, Dow Jones Newswires via The Agribusiness Examiner: Smithfield Foods Inc.'s winning bid for Farmland Industries Inc. pork assets should bring home the bacon, Wall Street concluded [October 13, 2003].

Three brokerages raised their ratings on the nation's largest pork processor, calculating that Farmland's acquisition would be significantly accretive to earnings in the coming fiscal year.

Among its potential, the deal should help Smithfield's relationship with Wal-Mart Stores Inc. (WMT), analysts said.

"Farmland is a major supplier of case-ready pork to Wal-Mart and this acquisition puts some momentum back into Smithfield's case-ready initiative," said Prudential Equity Group's John McMillin, referring to the meat processor's delivery to supermarkets of packaged cuts, which eliminate the need for in-store butchers.

Shares of Smithfield were trading recently at $20.61, up $1.40, or 7.3%, on heavy volume on the New York Stock Exchange.

Smithfield outbid agribusiness giant Cargill Inc. over the weekend for the pork-processing assets of Farmland, a large Kansas City farmer-owned cooperative in bankruptcy-reorganization proceedings. The court conducting the auction accepted Smithfield's offer of $367.4 million, plus the assumption of $90 million in pension obligations.

Cargill's final bid couldn't immediately be ascertained. Last month the Minneapolis firm had bid $385 million for the pork producing $363.5 million. A Cargill spokesman, Mark Klein, declined to comment on the bidding [October 13] but issued a brief statement in which Cargill congratulated Farmland's bondholders and creditors. "Obviously we are disappointed that we did not prevail," the statement said.

Merrill Lynch analyst G. Leonard Teitelbaum upgraded Smithfield to buy from neutral while Pen Jones and Eric Katzman at Deutsche Bank Securities went to a buy from hold. McMillin at Prudential raised his rating to neutral weight from underweight.

In a report titled "Fattening the hog," Teitelbaum estimated fiscal 2005 earnings of $2.09 a diluted share for Smithfield, up from $1.75. His revision assumes a net impact of 34 cents a share from the Farmland acquisition. The First Call consensus for Smithfield in '05 is $1.92.

Teitelbaum didn't adjust current-year earnings projections because of uncertainty over when the deal will close and unanticipated costs that may emerge.

"With Smithfield's strong position in the Southeast combined with Farmland's dominance in the Midwest, the two operations complement each other geographically and should accrue to the benefit of the retail supply chain," Teitelbaum wrote in a note. The deal also should benefit Smithfield's profit margins, he added.

The analyst noted that the Justice Department has said it wouldn't seek to block the sale, "since post-acquisition Smithfield would not hold over 30% share of the pork market."

Prudential's McMillin raised his fiscal 2005 earnings estimate for Smithfield to $1.90 a diluted share from $1.75 and boosted his target price on the stock to $22 from $21.

"This final offer was much better than we had feared," he said. Noting that Smithfield recently sold a Canadian operation, McMillin said that move allowed the company to make the Farmland bid without going to the equity market to raise capital, "which was a concern for investors."

Contending that the addition of Farmland's $1.8 billion in sales should be immediately accretive to Smithfield's earnings, Deutsche Bank analysts Jones and Katzman raised their fiscal 2004 earnings estimate to $1.46 a diluted share from $1.40. Their fiscal '05 forecast went to $2.05 from $1.90.

The analysts boosted their target price on Smithfield shares to $25 from $21.

Jones and Katzman said the deal should reduce Smithfield's earnings volatility. While their model projected an addition of 15 cents a share to full-year earnings initially, the analysts said that doesn't include synergies, pending company guidance.

"In addition to the benefits from the Farmland deal, we believe Smithfield is well-positioned to take advantage of the ongoing return to a more normalized protein environment," Jones and Katzman said.

Commenting on the company's move into beef over the past two years, the Deutsche analysts said that strategy looks "better and better each day" as beef prices continue to rise.

"Importantly, the spillover effect from the strength of beef is also lending support to the prices of other, less expensive proteins (i.e., pork, chicken, and even turkey)," they wrote.

None of the analysts mentioned personally owns Smithfield shares, but Merrill and Deutsche Bank said investors should assume they seek to do business with companies their analysts follow. Credit Suisse First Boston said it may seek investment-banking business with Smithfield in the next three months. Prudential said it knows of no potential conflict of interests.