Brazil’s JBS buys three major beef operationsWritten by Christy Hemken
JBS, already the largest beef processor in the world, now only competes with Tyson Foods and Cargill Meat Solutions after its purchase of National Beef Packing Co.
The sale will combine all of National Beef’s operations and facilities, including National Carriers Inc. and its ownership in Kansas City Steak Company LLC, with JBS Swift’s beef operations.
The purchase price was $465 million cash and $95 million in JBS common stock. JBS assumed National Beef’s debt of an estimated $425 million. The deal’s total value is about $1 billion, while last spring’s Swift purchase totaled $1.4 billion.
In addition to is National Beef Packing purchase, JBS also announced March 4 its purchase of the beef processing and cattle-feeding portion of Smithfield Foods – Smithfield Beef - for $565 million cash.
Also, it bought Australia’s Tasman Group for $150 million cash. Tasman operates six plants – three in Victoria and three in Tasmania.
The total cash and stock portion of the three purchases is valued at $1.3 billion.
Five Rivers Feeding
The Smithfield Beef sale to JBS will include 100 percent of Five Rivers Ranch Cattle Feeding LLC, currently held by Smithfield Beef in a 50/50 joint venture with Continental Grain Company. The two have agreed that before the closing of the JBS transaction Smithfield Beef will buy from CGC its 50 percent of Five Rivers for 2.167 million shares of Smithfield common stock.
The transaction excludes substantially all live cattle inventories held by Smithfield Beef and Five Rivers as of the closing date, together with associated debt. Live cattle currently owned by Five Rivers will be transferred to a new 50/50 joint venture between Smithfield Foods and CGC, while live cattle currently owned by Smithfield Beef will be transferred to another subsidiary of Smithfield Foods.
Smithfield believes most of the live cattle will be sold within six months after closing with almost all sold within 12 months. Proceeds from the sale of Smithfield Beef’s live cattle, together with Smithfield’s 50 percent interest in Five Rivers’ cattle, net of associated debt, are expected to exceed $200 million.
Smithfield Beef processes approximately 1.5 billion pounds of fresh beef annually and its processing capacity is 7,600 cattle per day. Five Rivers is the largest cattle feedlot operation in the U.S. with a one-time feeding capacity of 811,000 head.
Running the numbers
Smithfield, ranked first in the nation in pork production and fifth in beef production, plus National Beef Packing, the nation’s fourth largest meat packer, makes JBS the largest U.S. meat packer, ahead of Cargill Meat solutions, reported the Wall Street Journal.
In 2007, Smithfield Beef of Green Bay, Wisc., reported sales of $2.6 billion. National Beef has operations based in California, Pennsylvania and Georgia and in 2007 had sales of $5.6 billion and processed 3.9 million head of cattle.
Previously JBS had $12 billion in annual revenue from operations around the world, including 23 plants in Brazil and six in Argentina; it processed about nine million head of cattle last year.
Wall street responds
In response to the JBS purchases, stocks of meat processors rose sharply on Wall Street March 5. Tyson Foods shares rose more than six percent to $15.86 on the New York Stock Exchange (NYSE). Cargill Meat Solutions is privately held.
Smithfield Foods shares rose more than five percent to $29.29 on the NYSE March 5.
JP Morgan analyst Pablo Zuanic wrote in a note to investors that selling its beef business allows Smithfield to focus on its pork operations and overseas pork expansion plans.
Reduced capacity needed
“What the cattle industry really needs is reduced processing capacity for its outlook to improve,” says Lisa Keefe of Meatingplace.com.
Although Tyson Foods shut Emporia, Kan. beef processing operations in January 2008, CattleFax analyst Kevin Good says there’s still excess capacity in the market. Experts estimate there is an overcapacity in the beef industry of between 10,000 and 14,000 head of cattle per day.
“I don’t know who it will be, but this is enough to force someone else to make adjustments sooner or later,” Oklahoma State University livestock analyst Derrell Peel says of the purchase’s potential to pressure other market players to downsize.
“For us to turn more positive, the industry would have to further rationalize capacity by two to three plants, the cattle cycle would have to start expanding again and the Asian markets would have to ease their restrictions on U.S. beef,” wrote Zuanic in a note to investors in February.
The JBS purchase will require regulatory approval, although analysts don’t anticipate there will be a problem. Estimates put JBS market capacity after the purchase at around 30 percent, while Tyson and Cargill Meat Solutions are each somewhere just above 20 percent.
Approval is expected, in part, because the U.S. beef industry is becoming increasingly global. “It’s the way of the world, especially for packers. There are going to be fewer and bigger entities, and it’s going to be a more global industry,” says Good.
“Time and time again, cattle producers have had to watch helplessly as the multinational meatpackers manipulate the cattle market for their own benefit, and additional concentration among the packers likely will reduce even more the number of cattle operations in the United States,” says R-CALF USA Region II Director/Vice President Randy Stevenson, who represents Wyoming, Colorado, Utah and New Mexico.
“R-CALF USA is again calling on Congress to immediately amend the Packers and Stockyards Act (PSA) to prohibit the anti-competitive practice of packer ownership of livestock by the largest meatpackers, and we are strongly encouraging the Department of Justice to block JBS’ efforts to further consolidate the U.S. meatpacking industry,” he continues.
“There are some countries that allow certain medicines and hormones to be used on their cattle that are outright banned here in the United States,” he points out. “It is imperative that the U.S. cattle herd maintain its distinct identity because of the high quality and safety of domestically produced cattle.”
“The last thing the U.S. cattle herd needs is to be lumped into a North American herd, what with Canada’s BSE (bovine spongiform encephalopathy) problems and Mexico’s persistent problems with bovine tuberculosis,” asserts Stevenson.