A Million Pages Later, Smithfield Still Waiting on Merger OK

By Philip Walzer, The Virginian-Pilot, Norfolk, Va.

Feb. 13–In September, Smithfield Foods announced that it wanted to take over Premium Standard Farms for $810 million in stock and cash.

The combination of the nation’s top two pork producers would give Smithfield control of roughly 20 percent of the nation’s hogs.

Nearly five months and more than 1 million pages of submitted documents later, Smithfield is still waiting to hear whether the deal passes antitrust muster with the U.S. Department of Justice.

The proposed merger has triggered cries of alarm from consumer and farming groups, Midwestern senators, and even The New York Times editorial board. They worry about the potential squeeze on small farmers and consumer choices.

The pork companies announced last week that they had completed the “second request” for information by the Justice Department’s Antitrust Division.

Only 3 percent of proposed mergers trigger that level of scrutiny from the Justice Department, according to government statistics, but that doesn’t necessarily mean Smithfield will face trouble.

“It may indicate heightened scrutiny on the part of the Justice Department,” said Carl Tobias, the professor of law at the University of Richmond. “But it may be they just didn’t have specific information from the first batch of material, and they want to follow up.

“My sense is that, generally in the Bush administration, the Justice Department has been rather receptive to mergers.”

That doesn’t mean Smithfield will get the whole hog, either.

In most cases, second requests lead to government intervention, but not lawsuits to block the merger, said Patricia Sullivan, the co-chairwoman of the antitrust practice group at Edwards Angell Palmer & Dodge LLP in Providence, R.I.

“Very often, the merging parties and the regulators reach an accommodation,” Sullivan said, “and then the merger is closed with conditions,” such as the divestment of certain assets.

Smithfield and Premium Standard Farms said in a statement last week that they have agreed to allow the Justice Department 60 days to review the material “and an additional 30 days thereafter for review should the Antitrust Division deem necessary.”

Jerry Hostetter, Smithfield’s vice president for investor relations and corporate communications, said the additional request for information was “very routine” and “totally anticipated.”

He said he could not discuss what the material contained. “Their normal interest is in market concentration and market shares,” Hostetter said.

Smithfield has never been blocked from previous mergers, he said. “Certainly, an option of the Justice Department is to request a divestiture,” Hostetter said. “I can’t comment on the likelihood of that.”

Bart Chilton, the chief of staff of the National Farmers Union, which has criticized the proposal, said the department “has been more attentive than I expected. They appear to be methodical and genuinely interested in our concerns. That doesn’t mean they will do what we want.”

Gina Talamona, a spokeswoman for the U.S. Justice Department’s Antitrust Division, did not respond to an e-mail or a phone message.

Premium Standard Farms, meanwhile, will hold a stockholders meeting on whether to approve the merger Feb. 23 in Kansas City, Mo.

The announcement of the merger in September drew howls of protest from organizations such as the National Farmers’ Union, which represents 250,000 farming families, and lawmakers including U.S. Sen. Chuck Grassley, R- Iowa.

Grassley reiterated his “serious reservations” about the deal at a Senate hearing last month. “I’m concerned about reduced market opportunities, possible anti-competitive and predatory business practices, and increasing agribusiness consolidation,” Grassley said.

In its editorial in September, The New York Times said the deal “would mean fewer markets for farmers and fewer choices for consumers…. There is little or no role for the independent farmer in this landscape.”

Hostetter said he could not address the critics’ points directly during the department’s review. However, he added: “They are the same people that complained about our buying Farmland Industries in 2003. We’ve brought them out of bankruptcy. We’ve shown we’ve made them a vibrant, competitive organization.”

The Justice Department made its request for additional information in November. “Once you get into the second request, you’re not filling out forms,” said Sullivan, the antitrust lawyer from Providence.

“It can be pretty gargantuan: ‘Produce all of your documents. Give me your e-mails. Let me interview your director of marketing, the head of your IT department.’ ” Hostetter said the response was “incredibly expensive,” though he declined to identify the cost to Smithfield.

“I have every reason to suppose it was like the Farmland second request,” he said. “That response was 3 million pages.”

The Justice Department’s Antitrust Division has come under attack for being too soft on businesses. Grassley, in his comments at the hearing, cited an article in the weekly newspaper Legal Times last month on the perception among lawyers that the division is squeamish about challenging mergers.

Sullivan put it this way: “Right now, merger enforcement is characterized by a willingness on the part of the regulators to work with the merging parties to become surgical about solving the competitive problems yet allowing the transactions to close.”

That makes sense “if you believe corporate entities should be free to right-size themselves and let the market punish them if bad decisions are made,” Sullivan said. “But if your philosophical belief is ‘big is bad,’ this is a very dangerous approach.”

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SFD, PORK, NYT,