Judge Approves Cargill's
Continental Purchase

Cargill Inc.'s purchase of the grain commodity division of Continental Grain has been given final approval by Judge Gladys Kessler of the US District Court for the District of Columbia after the US Department of Justice filed a Final Judgment motion with the court.

While the judge's approval was expected, the fact that her decision was made over three months ago on June 30 and only became public knowledge recently after The Calamity Howler learned from a DofJ attorney that such a judgment had been ordered left critics of the purchase puzzled and wary.

No mention of the judge's decision can be found on the DofJ's Cargill/Continental Case File web site nor in the news releases issued by the DofJ press office and, not surprisingly, no mentioned of the approval ever appeared in the media.

Judge Kessler, in granting the DofJ's Final Judgment, said that she found the DofJ's approval of the sale to be in "the public interest."

In making that judgment Judge Kessler noted that "the legal standard for the Court's public interest determination is a deferential one, allowing the Court to withhold its approval only under very limited conditions" and that "the Court may not withhold its approval simply because the proposed Final Judgment does not contain the relief the Court itself might have awarded after a trial on the merits resulting in a finding of liability.

"Moreover, the Court must confine its review of the proposed Final Judgment to the violations charged in the complaint. Approval should be withheld only if: a) any of the terms appear ambiguous; b) the enforcement mechanism is inadequate: c) third parties will be positively injured; or d) the decree otherwise makes 'a mockery of judicial power.'"

Just as did the DofJ dismiss the public comments challenging its divestiture order so did Judge Kessler in her nine-page "Memorandum Opinion."

Those challenges included: a) the proposed settlement did not go far enough to ensuring competition; b) that the DofJ's definition of the relevant markets was too narrow as the DofJ, considered only local and regional markets; c) after the merger Cargill would have the ability to depress the prices it pays to farmers, "who are a large and disorganized group of sellers, unable to assert any real control over the price they are paid for their grain;" d) the proposed Final Judgment did not address the problem of vertical integration in agribusiness; e) that there was no assurance in the Final Judgment that the divested operations would remain competitive forces in the relevant markets; f) that the DofJ failed to explain the benefits of the merger; g) that the DofJ failed to consider several other statues when structuring the proposed Final Judgment, and h) that the DofJ failed to consider the possibility of continuing anti-competitive behavior by Cargill after the merger, and the effect of the removal of Continental as a competitor of Cargill.

Justice Ignores Own Monopoly Guides

In its proposed Final Judgment filed on July 8, 1999. and its Competitive Impact Statement filed on July 23, 1999, which Judge Gladys Kessler relied on in approving Continental Grain's commodity division sale to Cargill, the US Department of Justice ignored its own anti-competitive guidelines.

Events surrounding the divestiture of the Cargill's leased Port of Seattle elevator vivid illustrates such DofJ hypocrisy

Discussing the nation's grain network the DofJ, in filing its "Complaint" on July 8, 1999, noted that in each instance, the geographic area from which a country elevator, river elevator, rail terminal, or port elevator receives grain is limited by transportation costs and is known as a "captive draw area" for that facility. Draw areas, they concluded, expand and contract only slightly in response to normal economic fluctuations in crop supply, crop demand, and transportation costs.

For many country elevators, river elevators, railroad terminals, and port elevators, draw areas overlap. Cargill and Continental often operated facilities that had overlapping draw areas, and they therefore competed with one another for the purchase of wheat, corn, and soybeans from the same producers or other suppliers.

In evaluating concentration is these "captive draw areas" under DofJ guidelines, any market with a Herfindahl-Hirschman Index ("HHI") above 1,800 is considered highly concentrated. The HHI is a way to measure concentration. It has more or less replaced the four-firm concentration ratio. It is calculated by taking the sum of the square of market shares. A monopoly is 100 squared, or 10,000. Ten firms, each with 10%, would be 10 times 10 = 1,000. A duopoly with equal shares would be 50 times 50 = 5,000.

The DofJ's Antitrust guidelines consider an industry with an HHI of 1,000 or less to be competitive, and an HHI of 1,800 or more to be pretty concentrated. An increase in the HHI of 100 is considered important enough to trigger a merger review.

In the Pacific Northwest "captive draw area" (which includes Western Minnesota, eastern North Dakota and northeastern South Dakota), for example, port range markets for corn and soybean purchases have been highly concentrated, with the top four port elevator operators accounting for 100% of all corn and soybean purchases in these markets. Cargill alone accounted for about 44% of all soybean purchases and 23% of all corn purchases while Continental, in a joint venture with Cenex Harvest States, accounted for about 50% of all soybean purchases and 30% of all corn purchases in the same port range.

Thus, prior to the proposed acquisition, the Cargill/Continental HHI was 4468 for soybeans and 3640 for corn, well beyond the HHI guideline.

With the DofJ divestiture order, the elevator Cargill had leased from the Port of Seattle, Washington since 1970 was in turn leased to Louis Dreyfus who assumed the remainder of Cargill's five-year lease. The Port will continue to receive more than $1 million a year in rent, including 50% of all dockage revenue generated from the facility. Dreyfus will have the option of renewing the lease once it expires in November 2005.

Cargill in turn assumed 50% control of the nearby Tacoma, Wash., port terminal with Cenex while some 100 miles to the south on the Columbia River, ConAgra, Archer Daniels Midland (ADM) and the Mitsubishi Corp. a leading Japanese trading company, operate the Kalama Export Company LLC, affording western Washington State a who's who of the international grain trade.

In all of the ten US facilities ordered divested by the DofJ, half of them have are now part of the Louis Dreyfus corporate structure. The Louis Dreyfus Corporation, with world headquarters in Paris, France and US headquarters in Wilton, Conn., traditionally has been ranked among the four largest grain traders in the world, behind Cargill, Continental and the Bunge & Born Corporation. In 1999 the privately-owned company generated $18 billion in revenue.

Private Equity Fund Bids for IBP Purchase

For approximately $2.4 billion in cash plus the refinancing and assumption of approximately $1.4 billion in debt, Rawhide Holdings Corporation, a wholly owned subsidiary of DLJ Merchant Banking Partners III, L.P., a private equity fund affiliated with Donaldson, Lufkin & Jenrette, Inc., has reached an agreement to purchase the outstanding stock of IBP.

Upon completion of the purchase , project to be in early 2001, DLJ Merchant Banking Partners III and affiliated funds will become the majority owner of IBP, the nation's largest meatpacker. Other investors will include Archer Daniels Midland Company, a Booth Creek Partners and certain IBP management employees.

Thompson Dean, Managing Partner of DLJ Merchant Banking Partners III, said, "We are excited to invest in a company that has such exciting growth prospects as well as strong management. We look forward to providing management with the capital to aggressively grow these businesses."

The surprise bid of $22.25 a share by DLJ , one of the nation's leading integrated investment and merchant banks of IBP, which has been branded as the nation's "number one corporate outlaw" immediately has raised a number of questions.

"I don't think it's a fair price at this point," Christine McCracken of Midwest Research told Dow Jones Newservices after reviewing the all-cash offer from DLJ, IBP's long-time investment banker. "Shareholders should expect something much higher" than what DLJ bid, she said. "On a strategic basis, this company should have at least a $27 or $28 stock," McCracken said. By her calculation, IBP has about a 30% share of the beef-processing market and 18% of the domestic pork-processing market.

Prudential Securities Inc.'s John McMillin, who has tracked IBP for years, agreed that "the bid's too low" and said, "The $64,000 question is, will another bidder emerge?"

Among those who have been suggested was Smithfield, Va.'s Smithfield Foods Inc., the nation's largest pork processor and producer, which recently took a 6.3% stake in IBP, its biggest rival. Noting that IBP stock was trading around $15 when Smithfield disclosed its stake, a company spokesman admitted, "We made some money on our investment."

Jerry Hostetter, the Smithfield spokesman, said the company has recently increased its stake in IBP to 7% but noted that Smithfield had filed Securities and Exchange Commission (SEC) forms indicating it was also a passive investor. Of the merchant bank's offer, Hostetter said: "We just learned about it. We're studying the situation."

Another question raised by the DLJ purchase relates to the fact that DLJ itself is in the process of being acquired by Credit Suisse First Boston for $11.5 billion and the IBP deal would be DLJ's biggest acquisition.

Also, the chairman of DLJ, John S. Chalsty, is a longtime IBP director. He also chairs the company's compensation committee, which last year awarded IBP Chairman and Chief Executive Robert L. Peterson a $6.3 million bonus on top of his $1 million salary. In FY 1999 Peterson received a total of $7,672,917 in executive compensation.

Technically, DLJ's bid was made through an affiliated private equity fund called DLJ Merchant Banking Partners III LP. The acquisition announcement said that and other affiliated funds would become the majority owner of IBP. Significantly, the group also includes ADM, "Supermarkup to the World," which holds 13.3% of IBP's common shares, and thus takes it out of the running as a counter-bidder.

According to filings with the SEC, ADM bought the IBP shares as a passive investment about two years ago. Larry Cunningham, a spokesman for ADM, said his company now owns "roughly 14%."

Booth Creek Partners is a holding company controlled by businessman George Gillete. Gillete also once served as the chairman of Corporate Brands Foods, which the Dakota Dunes, South Dakota.-based IBP purchased.

A.V. Krebs operates the Corporate Agribusiness Research Project, P.O. Box 2201, Everett, Washington 98203-0201; email; web site:

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