Update: DLJ's Rawhide Holdings Makes Bid for Majority Stake in IBP

Updated from 1:55 p.m. EDT

A fund affiliated with the New York-based investment bank Donaldson Lufkin & Jenrette (DLJ) offered to buy a majority stake in IBP (IBP), a meat producer, for $2.4 billion in cash, the bank said Monday.

The offer from Rawhide Holdings, a subsidiary of DLJ Merchant Banking Partners III, would imply a value of $22.64 a share for the 106 million shares outstanding, though DLJ said the shares would be converted to the right to receive $22.25 in cash apiece.

Shares of IBP finished Monday regular trading up $3.48, or 19% at $21.75.

Merchant banking funds typically make high-risk investments in pursuit of returns of 30% or greater. The DLJ fund intends to complete its purchase early next year, the bank said. The deal would include assumption and refinancing of $1.4 billion in debt, not included in the $2.4 billion figure.

In a statement, DLJ said other investors would include Archer Daniels Midland (ADM), Booth Creek Partners and certain IBP management employees.

Gary Mickelson, spokesman for IBP, said the offer represented a bid to take the company public. While the merchant banking fund would own a majority of the shares, he declined to elaborate on how the ownership would be divided.

According to filings with the Securities and Exchange Commission, Decatur, Ill.-based agricultural giant AMD bought the IBP shares as a passive investment about two years ago. Larry Cunningham, a spokesman for ADM, said his company now owns "roughly 14%."

Booth Creek Partners is a holding company controlled by businessman George Gillete, Mickelson said. Mickelson said Gillete once served as the chairman of Corporate Brands Foods, which Dakota Dunes, S.D.-based IBP purchased.

Last month, Smithfield Foods (SFD) disclosed in SEC filings that it had acquired 5% of IBP.

Jerry Hostetter, a spokesman for Smithfield, said the company has recently increased its stake in IBP to 7% but noted that Smithfield had filed SEC forms indicating it was also a passive investor. Of the merchant bank's offer, Hostetter said: "We just learned about it. We're studying the situation."

For IBP, which sells beef and pork products to grocery stores, the offer comes during a period of rapid change in its customer base. Large grocery store chains, including Kroger (KR) and Albertson's (ABS), have moved the final stages of meat processing -- butchering and packaging -- from many of their stores to centralized processing facilities.

To concentrate on selling finished products to the stores, IBP will need to add facilities, employees and training for butchering and packaging, said Christine L. McCracken, analyst for Midwest Research. That means the company, which employs 49,000, has 60 production sites and generated sales of $14.1 billion last year, will be significantly less profitable for a year or so, she said.

"Investors are so focused on the near term, it would have been difficult to wait it out," said McCracken, who rates the shares strong buy and whose firm has done no underwriting for the company.

But Jaine I. Mehring, analyst for Salomon Smith Barney, dismissed that theory, attributing the timing to consolidation across the food production industry. "The company decided the stock was undervalued and some insiders pressed for a buyout," she said. Mehring rates the stock neutral, and her firm has performed underwriting for IBP.

Both analysts said the offer price seemed low. But while Mehring said a competing bid seems unlikely, McCracken reiterated a theory she forwarded in a recent report that Smithfield could offer $30 a share without diluting its earnings.

"Shareholders that paid a lot more than $22.50 in the last four years might not be so happy," McCracken said. The stock briefly traded above $30 before a split on Jan. 22, 1996. Since then, it has ranged from the low teens to the high $20s, but it has not surpassed $25.36 in the past year.

But in her report, even McCracken noted obstacles to a bid from a rival that a merchant banking firm would not face: a combined Smithfield and IBP would control 37% of the pork processing sector, possibly drawing attention from antitrust regulators.

Mark Moon, portfolio manager for Fuller & Thaler, a San Mateo, Calif.-based investment adviser, said he sold shares of the company after the announcement. If a competing bid is forthcoming, "I don't want to wait for it," Moon said. His firm owned 869,000 shares, a 0.82% stake worth about $14 million, as of June 30, according to SEC filings.

Mickelson, the IBP spokesman, said the deal would strengthen the company's link to an investment banking operation during a period when it may need access to capital to grow. "We are no longer just a meat packer. We are becoming a food company," he said.

The statement, officially issued by DLJ, the investment bank, indicted IBP management will remain in place after the merger.

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