Smithfield Foods hasn't lost its appetite
Under a new CEO, the pork giant continues its string of acquisitions

by Jack Milligan
for Virginia Business
November 2006

There’s a new man at the top at Smithfield Foods Inc., but the giant company’s global business strategy remains the same — get bigger by taking over the competition.

Under former CEO Joseph W. Luter III — who ran the company for 31 years and made 53 acquisitions — Smithfield became the world’s largest pork processor and hog producer. In August, 67-year-old Luter turned the job over to his longtime second in command, former COO C. Larry Pope. But Luter stayed on as chairman and, according to a company filing, has been given a renewable consulting contract for $1 million a year.

One of Luter’s new responsibilities is to help Pope find attractive acquisitions, and lately both men have been on a tear. Smithfield has made four deals since January, and each one provides valuable insight into the company’s expansion strategy. At the company’s annual meeting in August, Pope told shareholders that Smithfield is in the midst of a repositioning. During a recent interview with Virginia Business, he laid out his vision for the company. "Joe Luter did a good job of building the company," says Pope. "I hope my legacy is that people will think of Smithfield as a great packaged products company."

In September, Smithfield bought out Premium Standard Farms Inc. of Kansas City, Mo., the country’s second-largest pork producer. The $810 million cash and stock deal boosts Smithfield’s share of the domestic pork processing market to 32 percent. Its share of the hog production market grows to 18 percent, fulfilling Pope’s goal of becoming an even larger factor in the U.S. pork market, while also increasing the company’s share of the turkey market. According to the new CEO, the continued expansion of national grocery and retail chains is forcing Smithfield to grow as well. "Our customers are getting bigger and bigger, and we need to get bigger to supply their nationwide retail distribution systems," says Pope.

This was the same strategy Smithfield pursued under Luter, says William B. Chappell, a securities analyst at SunTrust Robinson Humphrey in Atlanta. "For the last 30 years, they’ve tried to consolidate the pork industry through their vertical integrated model." In vertical integration, Smithfield does everything from raising hogs to selling branded hams in supermarkets.

But there may be a limit to how much larger Smithfield can grow its core pork processing and hog businesses. Some analysts question whether the Premium Standard deal will pass inspection with anti-trust regulators in Washington who might feel it was too, well…piggish.

Pope is confident the deal will win U.S. Justice Department approval, but he concedes there might not be many more like it. "Our size [in the domestic pork market] is getting to be of some concern," he says. A more likely approach would be for Smithfield to use acquisitions to boost its U.S. beef and turkey operations, where it has smaller market shares. One protein sector that’s not on the menu: chicken. That industry is already well consolidated, notes Pope.

Two other deals he engineered in the United States will help transform Smithfield into a packaged products company. Early this year, the company paid an undisclosed price to acquire the Cook’s ham business from a subsidiary of Omaha, Neb.-based ConAgra Foods Inc. In October, Smithfield completed the $571 million acquisition of the assets of ConAgra’s branded meat business, which includes such well recognized brands as Armour, Butterball and Eckridge.

In both transactions, Pope has layered premium brands on top of Smithfield’s commodity-like production and processing capabilities. That’s because the commodity end of the meat business provides relatively low profit margins. Now its processed pork and turkey will be sold under its own premium brands instead of someone else’s. "That will enable them to raise their profit margins," says one securities analyst whose firm’s policies prohibit him from being quoted by name.

Yet, it’s the overseas market that seems to excite Pope the most. A recent deal to pay $575 million (plus the assumption of certain pension liabilities) for Chicago-based Sara Lee Corp.’s European meat business opens up some new possibilities. Sara Lee has operations throughout Western Europe, including France and Portugal. Just back from a weeklong trip to Poland and Romania at the time of the Virginia Business interview, Pope gushed about the region’s prospects. "Outside the United States, we are excited."

Smithfield is the No. 1 meat processor in Poland, which entered the European Union (EU) in May 2004. The company also has a significant operation in Romania, which will join the EU in January. Smithfield will leverage its low-cost manufacturing operations in Poland and Romania, says Pope, to serve its new markets in Western Europe (where manufacturing costs are higher) while also meeting increased demand for meat products as Poland and Romania raise their standards of living. "The economics are very compelling," he says.

So compelling, in fact, that much of Smithfield’s takeover activity in the years ahead may occur outside the United States. "I would expect that most of their focus will be on Europe," says Chappell.

Growing the company isn’t the only task demanding Pope’s attention. Smithfield continues to feud with the United Food and Commercial Workers International Union over unionization of its large Tar Heel, N.C., pork processing plant which employs 5,500 workers. This spring a federal appeals court upheld a 2004 finding by the National Labor Relations Board that the company’s subsidiary, Smithfield Packing Co., intimidated workers and violated federal labor laws during organizing campaigns in 1994 and 1997 that the union lost. About 300 of the union’s supporters showed up to protest Smithfield’s labor practices during a rally before the company’s annual meeting in Richmond.

Pope defends the company against the charge that it is anti-union. "It gets played out that we’re union busters, and we’re not," he argues. Smithfield has called for a new election at the Tar Heel plant. The union has proposed a different approach for voting in which employees would fill out cards indicating whether or not they want a union, an approach Smithfield opposes. At this point, according to Pope, the matter has reached an impasse.

Despite its growing profile as a global conglomerate, Pope says Smithfield remains a Virginia company at heart. But when asked if Virginia is a competitive venue for manufacturers, he expressed some concerns. "We have thought for some time that Virginia wants to become a service economy rather than a manufacturing economy," says Pope. "They don’t seem to support manufacturers of agricultural products, which we are." That explains why in recent years Smithfield has looked south instead, as when it built its giant pork processing plant in Tar Heel, N.C. "North Carolina has welcomed us with open arms," providing grants and processing permits quickly.

Pope also was disappointed that the Virginia legislature was unable to agree on a new state transportation plan. The company runs a tight delivery schedule from two processing facilities in Smithfield. Congestion on I-64 between the Tidewater region and Richmond, says Pope, complicates things. "It’s extremely important for us to be able to get out of here, and we’ve got only a few roads. It’s incumbent on state government to solve Virginia’s transportation problems."