(Adds heavy share trading before announcement, comment from environmental group)
By Diane Bartz
WASHINGTON Aug 27 (Reuters) - Tyson Foods Inc, the largest U.S. meat processor, on Wednesday won U.S. antitrust approval for its $8.5 billion purchase of Hillshire Brands Co .
To win approval for the merger, the companies agreed to sell Heinold Hog Markets, the U.S. Department of Justice said. The attorneys general of Iowa, Illinois and Missouri, all big hog-producing states, joined the settlement.
"Today's proposed settlement will help ensure that hog breeders in the United States will continue to receive the benefits of vigorous competition when selling sows," said Bill Baer, assistant attorney general for DOJ's antitrust division.
The two companies combined buy about 35 percent of all sows sold in the United States.
Tyson's share price rallied on the approval, rising as much as 2 percent before closing at $37.71, up 1.5 percent. Hillshire closed near steady at $62.96.
But about 10 minutes before the Justice Department announced the deal, the share prices of both companies dropped sharply and there was a large increase in stock and options volume, suggesting that traders were bracing for bad news.
Trading volume for Hillshire totaled 8.07 million shares, compared with the 50-day average of 2.54 million; of the total, trading volume, almost 5.5 million came several minutes before and after the DOJ's release, according to Reuters data.
Springdale, Arkansas-based Tyson is a massive seller of chicken, beef and pork while Chicago's Hillshire sells packaged meat brands such as Jimmy Dean, Ball Park and State Fair as well as bakery products like Sara Lee.
The companies overlap in the business of buying sows when they are too old to breed, the Justice Department said.
Heinold Hog Markets, which had revenues of $270 million and has operations in Illinois, Iowa, Indiana, Michigan, Minnesota and Nebraska, buys the animals from farmers and resells them to manufacturers. Hillshire buys them to make sausage for its Jimmy Dean and Hillshire Farm brands.
"Although the sale of sows constitutes a small percentage of overall revenues, farmers rely on this source of income as an important contribution to their earnings," the Justice Department said in a competitive impact statement filed with the U.S. District Court for the District of Columbia.
That court must approve the proposed settlement.
The deal had came under fire from some farm, consumer and rural organizations, as well as lawmakers like Senator Charles Grassley of Iowa, who worried that a larger Tyson will have power to push down the prices paid to hog farmers and drive up the prices paid by consumers at the grocery store.
"Because Tyson can align its pork slaughter business with Hillshire's branded processing business, Hillshire products will have a leg up on competitors, who will likely have to raise prices," said Wenonah Hunter, executive director of Food & Water Watch.
In a statement, Grassley said that requiring the sale of Heinold showed the Justice Department "took my concerns into consideration in regard to the slaughter sow market."