BUSINESSWEEK ONLINE : DECEMBER 18, 2000 ISSUE
BUSINESSWEEK INVESTOR -- THE BARKER PORTFOLIO Just Who Are the Piggies Here? Meat-packing giant IBP is up for grabs, and the low bidder includes its CEO and other insiders. Shareholders had better watch their toes With such flashy New Economy deals as the merger of America Online (AOL) and Time Warner (TWX) going on, why are a bunch of smart business people jockeying for control of America's leading killer of cattle? Two irresistible four-letter words: cash flow. I'm talking about the wrangling over IBP (IBP), which from its Dakota Dunes (S.D.) home is as far from the New Economy as smoke signals are from broadband. Just the same, as the nation's No. 1 packer of beef and No. 2 packer of pork, IBP expects this year to see $16.6 billion in revenue and more than $700 million in ''EBITDA,'' Wall Streetese for cash earnings before interest, taxes, depreciation, and amortization. That, along with its depressed stock, has drawn not one but three bidders. The first--a group including Credit Suisse, IBP CEO Robert Peterson, and other top IBP managers--bid $22.25 a share in cash. The second, offering stock it values at $25 a share, is Smithfield Foods (SFD), IBP's leading rival in pork. Finally, No. 1 chicken producer Tyson Foods (TSN) made a mixed, cash-and-stock bid it says is worth $26 a share. Who will win is unknowable: While IBP's board accepted the Credit Suisse-management bid, it left itself room to weigh the others. Meanwhile, IBP offers a dismaying look at how outside investors can get threatened when insiders offer to buy them out. Here's how I know: On Nov. 28, IBP filed a proxy statement describing the proposed Credit Suisse deal. It runs to 137 pages, but the heart of the problem can be found on just four pages in the middle, under the title ''Certain Financial Projections.'' There lie two tables full of numbers that imply very different values for IBP. GRAVY. The first table holds sales and profit forecasts that IBP gave to J.P. Morgan. A special committee of five IBP directors--those not joining in the Credit Suisse-led bid, and so the only ones without a conflict of interest--hired Morgan to help put a price on IBP. In other words, the first table shows how the people charged with selling IBP view the future. Below that table is a second, created by Credit Suisse. It, too, is based on forecasts made by IBP, but it represents the future according to the buyers. Its revenue and EBITDA projections vary a bit here and there. What's crucially different are its figures for capital spending. They're a lot lower, especially early on. Next year, for example, the Credit Suisse table lists capital spending of $350 million, while Morgan's lists $500 million. Next year through 2005, Credit Suisse budgets total capital spending at $1.4 billion; Morgan at $1.85 billion. Why does this matter? Because capital spending eats into what the Street calls ''free cash flow''--the money left after all is said and done, the final reward for any business' owners. And free cash flow was the key factor in Morgan's opinion that IBP is worth anywhere from $20 to $28 a share (chart). Had Morgan used lower capital spending numbers, its forecasts of free cash flow would've been higher, implying a higher value for IBP--something sellers usually want, right? Instead, the sellers depict a less valuable company than do the buyers. It's as if you tried to sell your car by advertising that it needs not just a brake job, but a transmission overhaul, too. Is your head reeling? Remember, Morgan got its forecasts from IBP. At the same time, the proxy says of Credit Suisse's numbers, ''IBP management agreed with these projections, and a copy was provided to the special committee of the board.'' How could IBP agree with two such different plans for capital spending, a variable entirely in its control? A spokesman could offer no explanation for the conflict. Nor is IBP's special committee of directors talking. But if you ask me, IBP's managers played a numbers game, hoping to get away with IBP on the cheap. As you might expect, such big investors as Brandes Investment Partners, which runs $46 billion in assets including 9.1% of IBP, aren't keeping quiet. Brandes plans to vote against the Credit Suisse deal, while hoping a sweeter bid wins out. Even if only by smoke signals, IBP's independent directors can't escape this message: They had better get shareholders a higher price. Questions? Comments? Send an e-mail to barkerportfolio@businessweek.com or fax (321) 728-1711 By ROBERT BARKER _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Just Who Are the Piggies Here? CHART: Valuing IBP INTERACT E-Mail to Business Week Online

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