Swift deal puts new player in U.S. meat market

By Bob Burgdorfer - Analysis

CHICAGO (Reuters) - The sale of U.S. beef and pork company Swift & Co. to Brazil's JBS-Friboi (JBSS3.SA) gives the South American company a presence in the U.S. market where its Brazilian-grown beef is banned.

The deal surprised many in the United States, who had expected Colorado-based Swift to be sold all or in part to U.S. meat companies.

"Based on recent conversations we've had with Smithfield (SFD.N), Tyson (TSN.N) and others in the meat industry, the hope was for consolidation and not a new player," John McMillin, Prudential Securities analyst, said in a research report.

For JBS-Friboi the deal will give it access to U.S. and Japanese beef markets, both of which are closed to uncooked Brazilian beef.

"They can't do business with Japan because of foot and mouth disease (in Brazil) and they can't do business with us. Now they can source product out of these operations to customers in Japan," said Steve Meyer, a livestock economist with Iowa-based Paragon Economics.

While the deal as announced creates the world's largest beef company in terms of animals slaughtered, according to JBS-Friboi, it would not affect market share of the major U.S. meat companies such as Tyson Foods Inc., Cargill Inc., National Beef and Smithfield Foods, economists said.

But market shares could change later if JBS-Friboi sells some Swift units. JBS-Friboi said the pork unit could be sold, while U.S. experts believe some beef units also could go.

"They have a lot of debt. They are going to make some changes. I don't know how they can not come around with another sale in two or three years," said Rich Nelson, livestock analyst with Allendale Inc., a Chicago-area brokerage firm. "The pork is the jewel of the company. The beef end is operating at so much under capacity."

JBS-Friboi bought Swift for $225 million in cash and the assumption of about $1.2 billion in debt.

Swift has been struggling for some time, hurt by a loss of beef export markets since late 2003 when the United States reported its first case of mad cow disease, and by losses in 2006 when U.S. immigration agents raided the company's plants.

The raids cost the company from $45 million to $50 million in lost earnings and in expenses to recruit and train new workers.

Swift's pork unit, which includes three U.S. plants, is considered a valuable part of the company, but JBS-Friboi said it may decide within a year to sell the pork unit.

"We don't work with pork and our business isn't pork," said Joesley Mendonca Batista, JBS-Friboi chief executive.

But U.S. analysts and economists said parts of Swift's beef unit could still be sold.

"I think for pragmatic issues I would not be surprised if we see some spinning off of some of their assets," Jim Robb, an economist with the Colorado-based Livestock Marketing Information Center, said. "I think it is still up in the air. The beef (unit) is struggling."