Smithfield Sells Beef Processing and Cattle Feeding Operations To JBS

US - Smithfield Foods, the US leading pig processor, is to sell its beef processing and cattle feeding operation, to JBS S.A. for $565.0 million in cash.
calendar icon 7 March 2008
clock icon 4 minute read

The sale to JBS will include 100 per cent of Five Rivers Ranch Cattle Feeding LLC ("Five Rivers"), which is currently held by Smithfield Beef Group, Inc. ("Smithfield Beef"), in a 50/50 joint venture with Continental Grain Company ("CGC," formerly ContiGroup Companies, Inc).

The deal follows closely on the heels of JBS's purchase of another major US beef processing operation - National Beef Packing.

Smithfield Foods and CGC have agreed that, immediately before closing of the JBS transaction, Smithfield Beef will acquire the 50 percent of Five Rivers from CGC that it does not presently own in return for 2.167 million shares of Smithfield common stock.

The purchase prices for JBS’s purchase of Smithfield Beef, and Smithfield Beef’s purchase of the 50 per cent interest in Five Rivers, are subject to customary adjustments, including adjustments for differences in working capital at closing from agreed-upon targets.

The deal excludes substantially all live cattle inventories held by Smithfield Beef and Five Rivers, 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.

The excluded live cattle will be raised by JBS after closing for a negotiated fee and then sold at maturity at market-based prices.

Proceeds from the sale of the excluded live cattle will be paid in cash to the Smithfield Foods/CGC joint venture or Smithfield Foods, as appropriate. Smithfield believes that most of the live cattle inventories will be sold within six months after closing with substantially all sold within 12 months after closing.

The proceeds from the sale of Smithfield Beef’s live cattle inventories, together with Smithfield’s 50 percent interest in Five Rivers’ cattle inventory, net of associated debt, are expected to be in excess of $200 million.

Smithfield Foods expects that the net proceeds of the transaction (consisting of the $565.0 million to be paid at closing, plus the net proceeds from the sale of the retained cattle inventory post-closing after payment of associated debt) will be used primarily for debt reduction.

Smithfield Beef processes approximately 1.5 billion pounds of fresh beef annually. 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 of cattle.

"We see this acquisition as an opportunity to participate in a segment of the business and a region where we are not present today. The synergy created will help us increase our customer base and reduce overheads in a highly competitive industry," said Wesley Mendonça Batista, Chief Executive Officer of JBS USA.

"We are pleased that Smithfield Foods is able to benefit our shareholders through this transaction by using the ultimate net proceeds of approximately $750 million to reduce leverage and invest capital in higher return businesses," said C. Larry Pope, president and chief executive officer.

"While outperforming the industry, our beef group has nevertheless been a relatively minor player, as we have been unable to grow through acquisition or justify building a new plant in this adverse environment. It makes sense to exit the beef business at this time," he said.

The transaction is expected to close as soon as possible subject to customary regulatory review and closing conditions.

Smithfield’s financial advisor in connection with the transaction was Evercore Partners and its legal advisor was Hunton & Williams LLP. JBS’s financial advisor was JPMorgan Securities, Inc. while Allen & Overy LLP acted as its legal advisor.

Further Reading

- Go to our previous news item on Smithfield Foods by clicking here.
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