Farmland Industries, a cooperative owned by 600,000 farmers that's become the nation's sixth-largest pork producer, has fallen on tough times. In bankruptcy, it's been selling off pieces of itself, and today it received the first major bid for its pork unit. SmithfieldFoods
Smithfield is a pork powerhouse and one of just four companies that have gobbled up other meat makers to dominate the scene -- the others being privately owned Cargill's Excel division, Tyson Foods
So what's an investor to make of this new development? First, don't make any hasty moves based on the news. The deal is not yet inked. Other bidders may emerge, antitrust concerns might kill the proposed union, or bankruptcy court might not approve it. Second, don't assume that the deal is nothing but good for Smithfield. If the firm ends up taking on more debt in order to buy Farmland, that could hurt its credit rating, which affects its ability to borrow. Already, Standard & Poor's has said it might cut Smithfield's credit rating.
Smithfield's full financials for its recently ended year aren't out yet, but as of fiscal 2003's third quarter, the company sported more than $1.5 billion in long-term debt and capital lease obligations and just $56.3 million in cash.
Of course, there's upside potential, too. As the industry becomes more concentrated, the remaining players wield greater power -- to set terms and pricing more to their liking, for example. Additionally, if this deal goes through, Smithfield will become a greater threat to Tyson, the top gun in the chicken and beef fields and the No. 2 player in pork.
Interested investors might want to watch developments here, and expect to see additional meaty acquisitions in the future.
If you don't have a taste for pork, you might want to consider the other white meat. Tom Gardner is a big fan of Sanderson Farms