The U.S. Department of Justice (DOJ) decision to allow JBS to purchase Smithfield, while pursuing a case to stop its merger with National Beef, was the week’s big news. Meanwhile, the industry's reaction was subdued as everyone tried to determine its actual meaning.
The best analogy I can think of is the classic wedding scenario in movies, where the preacher asks for anyone with objections to the union to “speak now or forever hold your peace,” and someone actually does it.
DOJ’s issue with the merger of JBS and National isn’t one of size, but competiveness. The agency believes that, because of demographic concerns, certain plant locations would limit competition in the High Plains and Southwest. In the scenario DOJ supports, there would still only be three major players, but the fourth player (National) would remain a separate entity and provide competition in certain key areas.
Contrary to earlier speculation that JBS might abandon its purchase of Smithfield, JBS has indicated it plans to go ahead with the Smithfield purchase, while pushing its case to merge with National as well.
The interesting thing will be to see the impact on National Beef. It is widely considered to be one of the better managed companies, and the merger appeared to be a positive step for National's competiveness. This whole situation becomes pretty technical in a hurry, but if JBS isn’t allowed to own National, then it’s assumed Tyson or Cargill wouldn’t be allowed to own it, either.
Ironically, this has the effect of raising the relative stock value of the Big Three packers, with the industry already dealing with overcapacity. National apparently would only have outside industry players as suitors to provide additional capital, which is unlikely.
Speculation has already begun on whether National could sell itself off in smaller pieces to the Big Three and satisfy DOJ, but that would still result in what DOJ is striving to prevent. National has obviously been able to remain extremely competitive with the Big Three, but won’t receive the help it was anticipating with its debt load.
Often times in these cases, a divestiture of one or two plants in key regions can result in a modified merger being approved, but we’ll have to see if that dynamic is an option in this situation. DOJ's major concern seems to be with National's Brawley, CA plant, and Smithfield's Tolleson plant, as they’re the only significant buyers of cattle in the Southwest. These two plants aren’t a major part of the strategic vision of either company, so divestiture of one or both plants is very conceivable. But finding a viable entity or two entities to purchase these plants could prove to be very problematic.
We can expect this issue to end up in the U.S. Supreme Court, and the implications will be significant. After all, it’s a fine line to walk, and industry concentration and consolidation will continue to be a contentious issue.
Up until now, concentration and consolidation have led to improved prices for cattlemen and decreased prices for the consumer, which are good things, of course. But at some point when the line is crossed, the inverse will be the case.
The problem is determining where that line should be drawn, and then how do you deal with an industry where the number of players are locked in place. There are so many variables that economists are advancing multiple scenarios, but it’s hard to imagine a static packing industry in the face of a marketplace that is evolving so quickly.