The U.S. Department of Justice (DOJ) decision to block JBS SA's acquisition of National Beef Packing (NBP) delighted opponents of any further consolidation of the beef-processing industry. But it has created uncertainty about the industry's future. It also dealt a big blow to the producer-owners of NBP.
The question now is: If the DOJ decision stands, will NBP be unsaleable or even be able to survive on its own?
The DOJ decision was particularly disappointing to U.S. Premium Beef (USPB) members, NBP's majority owners. They were poised to get $261 million in cash or $286/share. That's 5.2 times higher than USPB's original share price of $55 in 1997.
USPB members were also to get another $50 million in patronage payments and $65 million in JBS stock under terms of the acquisition announced in early March. They had also hoped to be part of a more geographically diversified company, which would mean more delivery points for their cattle, and the ability to take advantage of JBS's global marketing strength. That's why the deal got more than 90% approval from USPB's unit holders.
All this is now in jeopardy because of DOJ's decision. A court upholding of the decision would make it impossible for NBP to attract another U.S. buyer. Neither Cargill Meat Solutions nor Tyson Foods, the two largest beef processors, would be allowed to acquire NBP.
It's also unlikely NBP could attract a private equity buyer, given the credit crisis and the uncertain future for beef-processing profits. The only other options for USPB would be to negotiate with DOJ to sell part of NBP to JBS and part to other companies, or seek a foreign owner. But who would or could buy a High Plains plant?
Bowing to politics?
DOJ was obviously mindful of the political clamor against further consolidation in beef processing. So it found justification through market-share data to block the NBP acquisition. JBS's proposed acquisition of NBP and the Smithfield Beef Group would have given it a 36% share of fed-cattle slaughter capacity.
The flaw in DOJ's decision is that had it allowed JBS to acquire both companies, the industry would still have three large beef packers in strong competition with each other. DOJ clearly wants four. Yet this is counter to many other industries where the “rule of three” players is accepted.
JBS would also have had an overwhelming share of the Southwest market and three large plants in close proximity on the High Plains. These were DOJ's other reasons for blocking the NBP acquisition because NBP has two Plains plants (Dodge City and Liberal, KS) and one in the Southwest (Brawley, CA). Yet Cargill has three High Plains plants, a fact that DOJ ignored.
DOJ's lawsuit also included statements that indicated it doesn't understand how supply and demand works, how packers operate and what impacts their profits. For example, DOJ said a JBS-NBP transaction would likely diminish the vigor with which JBS and other cattle buyers would compete for fed cattle, would make interdependent or coordinated conduct among the meatpackers more likely, and likely would result in lower prices for fed cattle sold by feedlots and cattle sold by producers, ranchers and feedlots.
But DOJ doesn't take into account over-capacity in beef processing at a time of declining cattle numbers in North America, which most analysts say will mean increased competition for fed cattle in the years ahead, whatever the structure of the packing industry.
Saying the deal would make interdependent or coordinated conduct among the meatpackers more likely doesn't make any sense. Hasn't DOJ heard of the Packers & Stockyards Act, which strongly prohibits any form of packer “collusion”?
DOJ also said that packers have extensive and timely information about the cash market and that the base price of formula and grid pricing arrangements is often linked to one of several USDA-reported regional cash prices. So what? Besides, producers at all levels have access to the same prices.
DOJ also said that when the packing industry reduces production levels, feedlots and cattle producers are paid less for fed cattle. That certainly wasn't true the last week of October. Packers reduced production but paid more for cattle even though their operating losses increased. JBS will need to bring up such points if it wants to prevail in court.
Steve Kay is a contributing editor to BEEF magazine and publisher of Cattle Buyers Weekly (www.cattlebuyersweekly.com).
