Oxy May Sell Sizable Share of Iowa Beef Unit : Cites Debt Reduction as Main Reason for the Plan
Occidental Petroleum said Monday that it might sell part of its cattle and hog processing subsidiary to the public, a step that analysts said could be a prelude to Oxy’s departure from the meatpacking business while raising $500 million to $735 million to reduce the company’s debt.
The move to shed part of IBP Inc., previously called Iowa Beef Processors, was described by one close watcher of Occidental as a case of “testing the waters” before deciding whether to sell the subsidiary and get out of the meat business altogether.
Occidental said it is considering the sale of a “substantial minority interest” in IBP, which accounted for nearly 45% of Oxy’s $15.3 billion in sales last year. The company described debt reduction as the main purpose of the plan. It was generally believed that the company would sell just short of 50% of the unit.
The company has said that it expects to repay $2.3 billion in debt this year. Through the recent sale of a pipeline division and other steps, Oxy has already repaid well over $1 billion since Jan. 1, analysts said.
The announcement was viewed favorably in the investment community. Occidental, headquartered in Los Angeles, was one of few oil company stocks to gain ground on the New York Stock Exchange as the Dow Jones industrial average fell 23 points. Oxy gained 37.5 cents to close at $39.25 a share.
Unit’s Role Debated
Occidental’s plans for IBP, which never seemed to fit with Oxy’s energy and other industrial holdings, have been the subject of speculation ever since the company bought it for about $800 million in stock in 1981.
Analysts long viewed the purchase as a quixotic move by Oxy Chief Executive Armand Hammer. The deal arose after Hammer and David Murdock, Iowa Beef’s biggest shareholder, traveled together to Russia to buy a horse. The IBP transaction led to trouble for Hammer almost immediately.
Murdock, a Los Angeles financier, became the biggest shareholder of Occidental as part of the bargain and gained a seat on the board. According to Hammer’s latest autobiography, Murdock used the toehold to try to seize control and run the aging chairman out of Occidental.
Murdock was finally bought out at a sizable premium. The turmoil also was instrumental in the resignation of Occidental’s No. 2 executive, Robert Abboud, bolstering Occidental’s reputation as a revolving door for would-be successors to Hammer, now 89.
Though IBP dominates the meatpacking industry with its 15 plants in the Midwest, profits in the highly competitive field are relatively slim. Cost-cutting efforts have caused major clashes with the United Food and Commercial Workers union at a large plant in Dakota City, Neb.
Despite its troubles, however, close watchers of Hammer theorize that he remains reluctant to sell IBP outright until he finds a way to replace its revenue--which far exceeded that generated by Oxy’s oil and gas operations last year.
Without the meat sales, Occidental would fall far below its current No. 18 spot on the Fortune 500, a frequent bragging point for the company. A Wall Street observer says that selling a large minority interest “lets him have it both ways.”
IBP earned $58.8 million last year on sales of $6.8 billion. The company attributed the unit’s 13% earnings gain to the sale of more meat at higher profit margins. The firm slaughtered about 20% of the cattle and 10% of the hogs processed in the nation last year.
It is understood that Occidental has rejected two offers for IBP in recent months that ranged from $1 billion to $1.2 billion, compared to the $1.5 billion that top company executives call the starting point for talks.
Salomon Bros., a New York investment firm, estimates the market value of IBP at $1.25 billion to $1.5 billion. Salomon analyst Bernard J. Picchi said Oxy would probably sell 40% to 49% of the subsidiary.
“It will reduce debt and is concrete evidence that Occidental is going to concentrate on its core energy businesses. All this will be viewed very positively,” Picchi said. “They may decide next year or the year after to sell the rest. This might be their way of testing the waters.”
The timing and terms of a public stock offering will depend on market conditions. Occidental said that before an offering IBP would borrow funds and transfer “a portion” of the proceeds to Occidental to reduce other outstanding debt.
Robert Peterson, a director and executive officer of Occidental and the top executive at IBP, would resign from Occidental while remaining chairman and chief executive of IBP.
