Red Robin
Well-known member
Smithfield is pushing into the beef and turkey industries
By JEREMIAH MCWILLIAMS, The Virginian-Pilot
November 25, 2006
"Y'all know Smithfield," drawls Southern food personality Paula Deen in a radio commercial. "They're the ham people."
True: Smithfield Foods Inc., which recently hired Deen to push its spiral-sliced hams and other signature products, is the world's largest hog-raiser and pork processor. And it plans to further fatten its pork portfolio. But the company, with sales of $11.4 billion in its fiscal year ended April 30, also is growing aggressively beyond its roots in hogs and ham.
A recent deal gave Smithfield a 49 percent stake in Butterball LLC, the nation's largest turkey producer. And a planned Oklahoma beef plant will make the Smithfield-based company the fourth-largest beef processor in the United States.
Smithfield, which appears to be testing antitrust limits with growth in its core pig and pork business, is trying to buy or build its way into bigger positions in nearly every type of meat except chicken, which it has avoided so far.
"This is the most active period in Smithfield's history," chief executive C. Larry Pope told analysts at a Boston conference in September. "In virtually every segment of our business today, something very significant is going on.... Smithfield is not just in the pork business."
Smithfield is betting that the vertically integrated model it honed in pork - controlling production from animal-raising to meat-packing - will translate well to beef.
Smithfield has just 6 percent of the U.S. beef-processing market. But the company is dwarfed by the top four players, which together control 83 percent, according to its estimates.
"We need to get bigger - we're still too small in beef," Pope said Monday as Smithfield donated turkeys to a Norfolk food bank. "Our customers, like Farm Fresh... want to deal with fewer and fewer suppliers."
For example, Tyson Foods Inc. is more than twice Smithfield's size. "We need to be of size to match," Pope said.
U.S. beef packers have struggled in recent years, largely because of high cattle prices and restrictions on exported U.S. beef in Asian nations such as Japan and South Korea, which blocked such imports after a case of mad cow disease was discovered in Washington state in December 2003. At Smithfield, for instance, beef yielded about 23 percent of its sales last year, but the division lost $2.8 million.
Several analysts believe that U.S. beef plants don't stay busy enough to make a profit.
Smithfield's new plant, announced Oct. 18, could further weaken the industry and hurt Smithfield's earnings per share, said JPMorgan analyst Pablo Zuanic.
Construction on the $200 million plant in Texas County, Okla., is scheduled to begin in January. A 50-50 joint venture with ContiGroup Companies Inc., the plant will be able to slaughter as many as 5,000 cattle daily.
Zuanic suggested last month that Smithfield might be using "gamemanship" - the threat of tougher competition in an already battered industry - to force private equity firm HM Capital Partners to sell Swift & Co., a major beef and pork processor and longtime Smithfield target.
Pope denied that.
Because the Japanese market reopened this summer and Korea is loosening restrictions, "those markets will be alive and well" in two years, Pope said. The Oklahoma plant could help Smithfield target the export markets.
"There's a real opportunity to grow on the beef side," said Bill Chappell, an equity analyst in Atlanta with SunTrust Robinson Humphrey. Although beef is a secondary project for Smithfield, "they want to make a go of it."
The new plant will draw from Smithfield's cattle-feeding joint venture with ContiGroup, which can feed 811,000 cattle at its 10 feed lots in Colorado, Kansas, Idaho, Texas and Oklahoma. It is the largest cattle-feeding operation in the country.
"We do have the cattle," Pope said at Smithfield's annual meeting in Richmond three months ago. "We could put together an integrated model that would be pretty compelling."
Smithfield's ability to trace cattle from feed lots to meat-packing lines - similar to its "traceability" in hog slaughtering, which the company touts as a safety benefit - could pay dividends, said Andrew Wolf, a managing director in Richmond with BB&T Capital Markets, which is seeking investment banking work from Smithfield Foods.
"They'll have control of the animal the whole time," Wolf said. So Smithfield will be able to get "a deserved premium on the export market."
The Butterball purchase, at least in name recognition, is one of Smithfield's most eye-catching moves.
Pope has said Butterball is "the national brand - it is almost synonymous with the word 'turkey.' "
This fall, Carolina Turkeys, of which Smithfield already owned 49 percent, shelled out $325 million for ConAgra Foods Inc.'s Butterball turkey operations. Renamed Butterball LLC, the Mount Olive, N.C.-based turkey producer is a joint venture with Maxwell Farms Inc.
Butterball gives the former Carolina Turkeys, and its owners, a stronger cache among consumers. Butterball's products command premium prices, Pope said. That matches a key Smithfield strategy - shifting the business into more profitable products such as pre-cooked sausages and bacon, and capitalizing on the higher prices consumers will pay for convenience.
In addition to the Butterball acquisition, Smithfield paid $246 million in cash for the rest of ConAgra's branded meats business, which included Armour and LunchMakers.
Convenience products such as precooked ribs can command prices eight or 10 times higher than unprocessed, fresh meat, Pope said in September.
It's "a gigantic move up the value chain," Pope said. "You can do the simple math on this, and the math is pretty darn explosive."
While it expands in beef and turkey, Smithfield is running into opposition as it tries to complete a strategic buy in its core business: the planned $810 million deal for Premium Standard Farms, a Kansas City-based hog raiser and processor.
The proposal, announced in September, sparked protests from farming groups and Midwest politicians who argued that the merger of the nation's top two hog-raisers would give Smithfield too much power over small hog farmers.
"It makes no anti trust sense to allow Smithfield to buy Premium Standard Farms," said Michael Stumo, an attorney for the Lincoln, Neb.-based Organization for Competitive Markets. "It is a 100 percent power grab."
The Department of Justice this month asked Smithfield and Premium Standard for more information on the merger - a move that will delay the deal until the companies comply. Such requests occurred in only 3.1 percent of transactions in fiscal 2005, according to a Department of Justice report.
"It indicates that you're much higher on the radar of the Justice Department than you'd like," said Thane Scott, co-chair of the antitrust practice group at Edwards Angell Palmer & Dodge in Boston. "If you get a second request, you're in the danger zone."
Smithfield expected the additional scrutiny and would clear anti trust hurdles, Pope said. "We not trying to dominate the industry. We're trying to secure our future."
Still, if the deal goes through, Smithfield will have "probably grown as big as it can in the U.S. pork business," said SunTrust analyst Chappell, who added that it can still expand its European pork business.
Pope, who was promoted to chief executive on Sept. 1, seems to relish adding new brands and looking for new opportunities. Smithfield makes no apology for being one of the most opportunistic companies in the meat industry.
"We are committed to global expansion," Pope said.
content.hamptonroads.com
By JEREMIAH MCWILLIAMS, The Virginian-Pilot
November 25, 2006
"Y'all know Smithfield," drawls Southern food personality Paula Deen in a radio commercial. "They're the ham people."
True: Smithfield Foods Inc., which recently hired Deen to push its spiral-sliced hams and other signature products, is the world's largest hog-raiser and pork processor. And it plans to further fatten its pork portfolio. But the company, with sales of $11.4 billion in its fiscal year ended April 30, also is growing aggressively beyond its roots in hogs and ham.
A recent deal gave Smithfield a 49 percent stake in Butterball LLC, the nation's largest turkey producer. And a planned Oklahoma beef plant will make the Smithfield-based company the fourth-largest beef processor in the United States.
Smithfield, which appears to be testing antitrust limits with growth in its core pig and pork business, is trying to buy or build its way into bigger positions in nearly every type of meat except chicken, which it has avoided so far.
"This is the most active period in Smithfield's history," chief executive C. Larry Pope told analysts at a Boston conference in September. "In virtually every segment of our business today, something very significant is going on.... Smithfield is not just in the pork business."
Smithfield is betting that the vertically integrated model it honed in pork - controlling production from animal-raising to meat-packing - will translate well to beef.
Smithfield has just 6 percent of the U.S. beef-processing market. But the company is dwarfed by the top four players, which together control 83 percent, according to its estimates.
"We need to get bigger - we're still too small in beef," Pope said Monday as Smithfield donated turkeys to a Norfolk food bank. "Our customers, like Farm Fresh... want to deal with fewer and fewer suppliers."
For example, Tyson Foods Inc. is more than twice Smithfield's size. "We need to be of size to match," Pope said.
U.S. beef packers have struggled in recent years, largely because of high cattle prices and restrictions on exported U.S. beef in Asian nations such as Japan and South Korea, which blocked such imports after a case of mad cow disease was discovered in Washington state in December 2003. At Smithfield, for instance, beef yielded about 23 percent of its sales last year, but the division lost $2.8 million.
Several analysts believe that U.S. beef plants don't stay busy enough to make a profit.
Smithfield's new plant, announced Oct. 18, could further weaken the industry and hurt Smithfield's earnings per share, said JPMorgan analyst Pablo Zuanic.
Construction on the $200 million plant in Texas County, Okla., is scheduled to begin in January. A 50-50 joint venture with ContiGroup Companies Inc., the plant will be able to slaughter as many as 5,000 cattle daily.
Zuanic suggested last month that Smithfield might be using "gamemanship" - the threat of tougher competition in an already battered industry - to force private equity firm HM Capital Partners to sell Swift & Co., a major beef and pork processor and longtime Smithfield target.
Pope denied that.
Because the Japanese market reopened this summer and Korea is loosening restrictions, "those markets will be alive and well" in two years, Pope said. The Oklahoma plant could help Smithfield target the export markets.
"There's a real opportunity to grow on the beef side," said Bill Chappell, an equity analyst in Atlanta with SunTrust Robinson Humphrey. Although beef is a secondary project for Smithfield, "they want to make a go of it."
The new plant will draw from Smithfield's cattle-feeding joint venture with ContiGroup, which can feed 811,000 cattle at its 10 feed lots in Colorado, Kansas, Idaho, Texas and Oklahoma. It is the largest cattle-feeding operation in the country.
"We do have the cattle," Pope said at Smithfield's annual meeting in Richmond three months ago. "We could put together an integrated model that would be pretty compelling."
Smithfield's ability to trace cattle from feed lots to meat-packing lines - similar to its "traceability" in hog slaughtering, which the company touts as a safety benefit - could pay dividends, said Andrew Wolf, a managing director in Richmond with BB&T Capital Markets, which is seeking investment banking work from Smithfield Foods.
"They'll have control of the animal the whole time," Wolf said. So Smithfield will be able to get "a deserved premium on the export market."
The Butterball purchase, at least in name recognition, is one of Smithfield's most eye-catching moves.
Pope has said Butterball is "the national brand - it is almost synonymous with the word 'turkey.' "
This fall, Carolina Turkeys, of which Smithfield already owned 49 percent, shelled out $325 million for ConAgra Foods Inc.'s Butterball turkey operations. Renamed Butterball LLC, the Mount Olive, N.C.-based turkey producer is a joint venture with Maxwell Farms Inc.
Butterball gives the former Carolina Turkeys, and its owners, a stronger cache among consumers. Butterball's products command premium prices, Pope said. That matches a key Smithfield strategy - shifting the business into more profitable products such as pre-cooked sausages and bacon, and capitalizing on the higher prices consumers will pay for convenience.
In addition to the Butterball acquisition, Smithfield paid $246 million in cash for the rest of ConAgra's branded meats business, which included Armour and LunchMakers.
Convenience products such as precooked ribs can command prices eight or 10 times higher than unprocessed, fresh meat, Pope said in September.
It's "a gigantic move up the value chain," Pope said. "You can do the simple math on this, and the math is pretty darn explosive."
While it expands in beef and turkey, Smithfield is running into opposition as it tries to complete a strategic buy in its core business: the planned $810 million deal for Premium Standard Farms, a Kansas City-based hog raiser and processor.
The proposal, announced in September, sparked protests from farming groups and Midwest politicians who argued that the merger of the nation's top two hog-raisers would give Smithfield too much power over small hog farmers.
"It makes no anti trust sense to allow Smithfield to buy Premium Standard Farms," said Michael Stumo, an attorney for the Lincoln, Neb.-based Organization for Competitive Markets. "It is a 100 percent power grab."
The Department of Justice this month asked Smithfield and Premium Standard for more information on the merger - a move that will delay the deal until the companies comply. Such requests occurred in only 3.1 percent of transactions in fiscal 2005, according to a Department of Justice report.
"It indicates that you're much higher on the radar of the Justice Department than you'd like," said Thane Scott, co-chair of the antitrust practice group at Edwards Angell Palmer & Dodge in Boston. "If you get a second request, you're in the danger zone."
Smithfield expected the additional scrutiny and would clear anti trust hurdles, Pope said. "We not trying to dominate the industry. We're trying to secure our future."
Still, if the deal goes through, Smithfield will have "probably grown as big as it can in the U.S. pork business," said SunTrust analyst Chappell, who added that it can still expand its European pork business.
Pope, who was promoted to chief executive on Sept. 1, seems to relish adding new brands and looking for new opportunities. Smithfield makes no apology for being one of the most opportunistic companies in the meat industry.
"We are committed to global expansion," Pope said.
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