Brazilians Bid for U.S. Meat Titan

By JEFFREY MCCRACKEN and LAUREN ETTER Brazilian beef giant JBS SA is set to announce as soon as next week the acquisition of Texas-based Pilgrim's Pride Corp. for a price of roughly $2.5 billion, say several people familiar with the matter. The deal would pull the second-largest chicken company in the U.S. out of bankruptcy court and shake up the global meat business. If the JBS deal for Pilgrim's Pride advances, the new company would create rival Tyson Foods, the biggest U.S. meat company. The deal was in the final stages of negotiation Wednesday and may yet fall apart. But if it moves ahead as expected, it would create a new US. rival to Tyson Foods Inc., which is the biggest U.S. meat company that produces beef, chicken and pork. Combined, Pilgrim's Pride and JBS's U.S. unit -- which includes sales at the JBS business in Australia -- would have posted $20 billion in revenue last year. Tyson's fiscal 2008 revenue was $26 billion. A JBS-Pilgrim deal would probably attract scrutiny from antitrust enforcers, who have said they plan to take a hard look at competition in the agriculture business. Any deal is sure to raise concerns across U.S. farm country. Some ranchers and chicken farmers are worried that greater concentration in the industry could decrease their power in the market and translate into lower prices for their animals in the long run. Representatives for JBS and Pilgrim's declined to comment. JBS, while not a household name in the U.S., is one of the world's largest meat producers and for years has been on a global acquisition binge designed to make it the biggest. Until now, JBS has largely confined itself to the red-meat business, which includes pork. Its core business involves buying live animals from ranchers and feedlot operators, slaughtering them and turning them into meat products that it sells world-wide. In contrast, Pilgrim's Pride is solely in the poultry business. Last year Pilgrim's Pride and Tyson each held about 22% of that market in the U.S. A Tyson spokesman declined to comment. On Monday, Walt Disney Co. announced the $4 billion purchase of Marvel Entertainment Inc. and Baker Hughes Inc. purchased oil-field-services company BJ Services Co. for $5.5 billion. Tuesday eBay Inc. announced the sale of a 65% stake in the Skype Internet-phone business to private investors for $2 billion. The move by JBS comes as people are eating fewer meals in restaurants, lowering demand for beef, chicken and pork. The drop in demand, combined with high animal-feed prices, helped push Pilgrim's Pride into bankruptcy court in December of last year. In the short run, a deal could keep prices low at the grocery store, especially if JBS hikes production of chicken. But opponents of industry consolidation fear that the meat giants will have the leverage to raise prices. The deal would be notable, because Pilgrim's Pride's banks and bond holders will likely be paid in full -- a rarity in bankruptcy court and a coup for distressed-debt investors who paid 5 to 15 cents on the dollar for the bonds late last year. There will also likely be money for the company's shareholders -- another infrequent event in bankruptcy court, where shareholders are typically wiped out. That could salvage some of the fortune of the company's former chief executive, Lonnie "Bo" Pilgrim, who helped found the Pittsburg, Texas-based company with his brother out of a ramshackle animal feed shop in the 1940s. Under the current proposal, JBS will make a "stalking horse" bid, in which it will be in the lead to acquire Pilgrim's Pride, though other bidders could later make competing offers, said the people familiar with the matter. In all, the offer is expected to be valued at $2.5 billion, according to a person familiar with the matter. It would pay off $1.2 billion in secured debt, about $1 billion in unsecured debt, accrued interest for the debtholders, and leave a "couple hundred million" for shareholders. Pilgrim's stock closed Wednesday at $5.15, giving the company a market value of $360 million. Investors that specialize in the securities of troubled companies have been anticipating a payoff at Pilgrim's Pride. A drop in corn prices has helped the company, because corn is a major cost in the feeding of chickens. The company turned in a small profit in the second quarter of 2009 after a small loss in the same period of 2008. The deal underscores the prevailing trend in mergers and acquisitions. Traditional deals have been sparse, yet distressed deals, defined as transactions related to bankruptcies, restructurings, recapitalizations or liquidations, have been abundant. More than 140 such deals have been struck this year, compared with 102 for all of 2008, according to data provider Dealogic. Last year, JBS completed its acquisition of Smithfield Beef, a large U.S. beef processor, from Smithfield Foods Inc. In February, JBS canceled its plans to acquire National Beef Packing Co., a large Kansas City, Mo., processor, after the deal was challenged on antitrust grounds by the Justice Department and 13 states. In 2007, the company bought Swift & Co., a U.S. meat company that traced its roots to the 19th century, for about $225 million plus the assumption of $1.23 billion in debt. Write to Jeffrey McCracken at jeff.mccracken@wsj.com and Lauren Etter at lauren.etter@wsj.com