Smithfield Stalks Farmland Pork
January 6 , 2003

SMITHFIELD Foods, the nation's largest pork company, continues to stalk Farmland Industries' pork business. Chairman and CEO Joe Luter is said to be keener than ever to buy the unit. Smithfield wants to expand its current 20% share of the U.S. pork processing market. It also believes there are excellent synergies between its John Morrell unit and Farmland's pork business. Smithfield is following Farmland's bankruptcy closely and had lawyers monitoring a hearing three weeks ago, says Luter. The company continues to be interested in buying Farmland's meat businesses, a spokesman told the Kansas City Start last week.

As part of his tactics, Luter has publicly opined that Farmland Pork won't survive as a standalone company. That's what he told analysts in November. Smithfield expects to be able to buy both Farmland's pork operations and its interest in the beef business out of bankruptcy, he told them. CBW believes Luter is more focused on getting the pork business and is not so concerned about Farmland National Beef.

Besides, Farmland Pork is part of Farmland Industries' bankruptcy proceedings but FNB is not. It is a partnership between Farmland and U.S. Premium Beef, a producer-owned cooperative. Farmland owns 71% of FNB and treats this as an investment. Farmland CEO Bob Terry has said it is unclear if it would be better for Farmland to sell its interest in FNB.

Smithfield appears to be more interested in acquiring the former Future Beef Operations plant in Arkansas City, Kan. The plant goes to auction this Wednesday (Jan 8) at the Louisville, Colo., law offices of Connolly, Rosania & Lofstedt. As previously reported (CBW, Dec 2, 2002), the lead bidder on the plant is Cowley County Acquisition LLC. It has offered $27M and put down $1M in earnest money. Also interested is LeForce Signature Beef, Oklahoma City, Okla. Seaboard Corporation, Shawnee Mission, Kan., is also said to be interested.

CBW understands Smithfield may be prepared to pay considerably more than $27M for the plant and its equipment. It may also be prepared to spend $15-20M to bring the plant up to its requirements. Most of this would be for a new cold storage system. Acquisition would fit Smithfield's long-term beef strategy of building its Holstein beef business. Smithfield unit Packerland Packing already ships fed Holsteins from Kansas to its Green Bay, Wis., plant.

Farmland Thinks Pork Can Be Profitable
Luter's opinion about Farmland Pork is contrary to what Farmland CEO Terry says, that Pork could be reorganized into a profitable business. Farmland's meat businesses are its "crown jewels" and they will be the centerpiece of Farmland's plan to repay creditors, its lawyers told a bankruptcy hearing last Monday. Farmland is in the process of determining how much creditors would get if its beef and pork businesses were to be sold outright to another company, attorney Laurence Frazen told the court.

Alternatively, the company's management is formulating a plan to reorganize the pork business into a standalone company that would repay creditors over time. Farmland thinks both avenues should be explored, he said. Given they are the crown jewels of the estate, Farmland is having discussions with people about them as ongoing businesses. The pork business may be more valuable to creditors if it is allowed to continue, he said.

Frazen's remarks were made as part of a request to hire Trinity Capital, a California-based company. It has the financial expertise to help Farmland find investors and financing if the pork business were set up as a separate business, he says. Trinity also can provide the court and creditors an idea of how much money the pork business might generate to be used to pay back creditors. Farmland would pay Trinity $150,000 down and $100,000 a month, reported the Kansas City Star. It would be obligated to a minimum payment of $350,000 total, says Frazen. Bankruptcy Judge Jerry Venters says he will decide the matter at the next hearing Jan. 14. This will give lawyers for Farmland's banks and the unsecured creditors time to evaluate the proposal.

Lawyers for both groups say they approve of the plan in theory. But they need time to review a revised contract with Trinity that Frazen presented to them shortly before the bankruptcy hearing last Monday. Observers say one of the key issues is how the judge will assess how best to satisfy the secured creditors. He will likely favor lead lender Deutsche Bank as Debtor in Possession. One of Smithfield's tactics has been to attempt to convince Farmland's key creditors that Smithfield's acquisition of Farmland Pork offers the creditors the best option, say observers.