Smithfield buys ConAgra meats for $575 million

Smithfield buys ConAgra meats for $575 million

Smithfield buys ConAgra meats for $575 million

For the second time this summer, Smithfield Foods Inc. has swept into the Chicago area to purchase a meat producer.

The Smithfield, Va.-based company on Monday announced it had reached agreement with ConAgra Foods to purchase its Naperville-based meats division and the Butterball, Eckrich and Armour brands for $475 million in cash and $100 million in Smithfield stock.

It was similar to the price that Smithfield paid for the European meats division of Sara Lee Corp., which, like ConAgra, is restructuring its operations. Sara Lee is to receive $575 million when that transaction is completed.

Both sale prices were lower than Wall Street had expected. ConAgra's meat division had sales of $1.8 billion, while Sara Lee's meat division had sales of $1.1 billion.

"We have a reputation for making opportunistic acquisitions, as was this one and the Sara Lee acquisition," said Jerry Hostetter, a spokesman for Smithfield, the world's largest pork producer.

Under the deal, which must be reviewed by government antitrust regulators, Smithfield is acquiring 16 ConAgra meat plants and the Naperville headquarters operation.

Hostetter said no decision had been made about the 6,000 people employed by the division and the 100 at the headquarters, but Smithfield historically has left the management and employees in place at the companies it has purchased.

He said Smithfield would combine the management of the Butterball turkey business, which it valued at $325 million, with Carolina Turkeys, a business it co-owns with Maxwell Farms Inc. Butterball is the No. 2 U.S. turkey producer, with sales of about $600 million annually. Carolina Turkeys is the fourth-largest turkey producer in the United States.

The combination is likely to pressure Hormel Foods Inc. and the turkey products it produces under the Jennie-O Turkey Store brand. Although Jennie-O currently is the largest, the combined sales of Carolina Turkey and Butterball will surpass Jennie-O.

"For Smithfield this is a big deal," said Greggory Warren, a food analyst with Morningstar Inc., a Chicago-based market research company. "This moves them up the value chain. They might actually make [profit] margins of 6 percent or 8 percent, and that's up from 3 percent to 4 percent."

C. Larry Pope, president and chief operating officer of Smithfield, confirmed that is the company's strategy. "This continues our previously announced strategy of utilizing our superior raw materials internally as opposed to selling in the commodity market," he said. "These brands will allow us to capture sales and marketing opportunities and more fully serve the needs of our retail and food service customers."

Warren said however, that Smithfield would face many of the same problems that were confronting ConAgra and Sara Lee--increased competition in the packaged meat aisle.

"There is a lot more competition coming online. Within the past 10 years, Hormel, Tyson and Perdue have been moving up the value chain to become packaged meat processors, and that just increases the competitive level within the industry," he said.

Despite those issues, both Warren and David Nelson, a food analyst with Credit Suisse, believe Smithfield is well-positioned to integrate the ConAgra operation.

"Though Smithfield has a lot to digest, we believe Smithfield continues to value its acquisition targets prudently and with a compelling strategy in place," said Nelson.