Barbara Young

I recently questioned what would happen if the U.S. Department of Justice (DOJ) obstructed an acquisition plan between agreeing parties.

At issue in this case is the announcement this past spring that the Brazilian red-meat giant JBS S.A. was going after two of America’s biggest beef companies: National Beef Packing Co. LLC of Kansas City, Mo., and the beef unit of Virginia-based Smithfield Foods Inc. This was not a hostile takeover situation.

Moreover, Joesley Batista, JBS Sao Paulo-based president, was confident that U.S. authorities would sanction the deal “without requiring the firm to divest its assets.” JBS had already entered the U.S. beef market with its May 2007 purchase of Swift & Co.’s beef and pork business from an investor group for $225 million in cash and the assumption of about $1.2 billion in reported debt.

Insiders and opponents expected the DOJ to question the acquisition while others predicted approval. Meanwhile, the stock market responded favorably to the acquisition announcement at the time based on a positive nod from analysts. Tyson Foods and Smithfield Foods were beneficiaries with a rise in their share prices that day.

Notably, the U.S. beef industry long has struggled in the face of excess processing capacity, sluggish exports and a slowing economy. One analyst saw the acquisition as a shot in the arm for the U.S. beef industry by allowing it a chance to keep beef production in line with cattle supplies.

The answer to my question came in late October via the civil antitrust lawsuit DOJ filed in Chicago’s U.S. District Court aimed at blocking the JBS proposed acquisition, but only of National Beef. Initially, DOJ saw the deal combining two of the top four U.S. beef companies as a flashpoint to higher consumer beef prices. Moreover, DOJ determined that allowing the acquisition would reportedly “lessen competition among packers in the purchase of cattle that has been critical to ensuring competitive prices to the nation’s thousands of producers, ranchers and feedlots.”

As a major protagonist in the drama, R-Calf USA was predictably charged by the DOJ move, extending gratitude to the DOJ and the state attorneys general joining the lawsuit. “We are grateful that [they] have considered our concerns and are taking meaningful action to protect U.S. cattle producers and consumers against the abusive market power than can result from industry concentration,” confirmed Max Thornsberry, R-Calf USA president. “Apparently the Justice Department’s merger investigation found that the most severe antitrust and anti-competitive problems stemmed from the proposed purchase of the fourth-largest meatpacker [National Beef] and not the fifth-largest meatpacker [Smithfield Beef].”

DOJ split up the package having no qualms with JBS acquiring Smithfield’s beef business, which cleared the way for the deal to go through two days later. Smithfield reported that it expected to use net proceeds from the transaction primarily for debt reduction. The sale of Smithfield Beef Group comprised beef-processing and cattle-feed operations. Based on the financial deal, Smithfield would receive $565 million at closing along with about $150 million from the sale of the retained cattle inventory post-closing after payment of associated debt.

C. Larry Pope, Smithfield’s chief executive, expected the transaction to “dramatically improve liquidity to about $900 million.” He further said that the money would help Smithfield “weather the difficult markets ahead” with a stronger balance sheet. “We have exited the beef business, where we had a small market share and little potential to grow,” Pope said.

In the end, Smithfield got its way and National Beef and its majority owner U.S. Premium Beef LLC did not. That’s not the end of the story, however.

“We are disappointed that the DOJ does not recognize that this transaction is pro-competitive and we plan to vigorously contest its attempt to block it,” vowed Steve Hunt, U.S. Premium Beef’s CEO. JBS is also vowing to fight. “We believe the government’s case is misplaced and look forward to defending this matter in court,” concluded Wesley Batista, JBS USA’s president and CEO.