HM Overcomes Disease, Goverment Raids On Swift Deal

Target: Swift & Co.

Purchase Price: $1.5 billion

Seller: HM Capital Partners

Sponsor: J&F Participações S.A.

Financial Advisors: Seller: J.P. Morgan; Sponsor: Rothschild

Legal Counsel: Seller: Vinson & Elkins LLP: Sponsor: Greenberg Traurig LLP, Velloza, Girotto & Lindenbojm

It wasn’t just the discovery of Mad Cow Disease in U.S. cattle that made HM Capital Partners’ five-year investment in meat processing company Swift & Co. a turbulent one. The company was also hit by a series of raids by government officials aimed at curbing illegal workers.

Nevertheless, HM Capital was able to walk gracefully away from the investment earlier this month with an ROI of approximately 2x, according to sources familiar with the situation. The Dallas-based buyout firm, along with equity co-investor Booth Creek Management Corp., sold Swift & Co. to J&F Participações S.A., which owns 77 percent of Brazil-based JBS S.A., Latin America’s largest beef processor, for north of $1.4 billion. The purchase price includes approximately $225 million in cash, and the assumption of about $1.2 billion in debt and transaction-related expenses.

Swift & Co. is but one of a series of recent exits that have helped HM Capital return approximately $1 billion to investors over the past three months, according to Partner Edward Herring. In June, HM Capital sold a $603 million stake in Regency Energy Partners to GE Energy Financial Services, while in May an HM Capital-led consortium penned a deal to sell Persona Communications Corp. to Bragg Communications Inc. It’s excellent timing, as the firm, successor to the troubled Hicks, Muse, Tate & Furst, is attempting to raise $1 billion for its sixth buyout vehicle, HM Capital Partners Sector Performance Fund.

HM Capital and Booth Creek acquired a majority stake in Swift & Co. from ConAgra Foods in 2002 for about $1.4 billion. The deal included a combined equity stake of about $145 million, Herring said. More equity was invested later to buy out ConAga’s remaining stake. In March 2005, HM Capital and Booth Creek took a $170 million dividend out of the company, recouping nearly all of their equity in the process.

Greeley, Colo.-based Swift & Co., the world’s third-largest processor of fresh beef and pork products, has plants in both the United States and Australia. It employs about 20,000 people worldwide. When HM Capital acquired the company, it planned to use the company’s Australian assets to gain market share in Japan, improve the operational performance of the U.S. beef division, and expand beyond just providing beef.

“A lot of our operational initiatives started taking shape within the first two years of the investment, and then we incurred some stiff headwinds,” Herring said.

Indeed. In late 2003, a cow infected with Mad Cow Disease was found in the United States, forcing the country to stop importing live cattle from Canada. Meanwhile, Japan and Korea closed their own borders to the importation of fresh meats from the United States. Despite posting an 11 percent increase in net sales in its fiscal third quarter ended Feb. 22, 2004, the company reported a $44.2 million earnings decline. EBITDA for the fiscal year ended May 29, 2005, fell to $163 million, down from $220 million the year before. The next storm hit in December. 2006, when officials from Immigration and Customs Enforcement raided several Swift & Co. plants and reportedly arrested some 1,300 workers suspected of being illegal immigrants.

The company’s performance has yet to fully recover. Swift & Co. reported EBITDA of negative $9 million for the third quarter of its fiscal 2007 ended Feb. 25. That figure represents a $21 million improvement from negative $30 million for the same period the year before.

Despite the difficulties, HM Capital began receiving unsolicited offers and inquiries from strategic buyers about Swift & Co. in the summer of 2006, Herring said. The firm hired JP Morgan to coordinate with the interested parties, which led to the sale earlier this month to J&F. The deal made J&F the world’s largest beef and pork processor.

“The testament to the value-add that we did achieve on the beef side is that the Brazilians came in and had a very crisp understanding of the business and they bought into it.” Herring said. “They were willing to look at this business through the cycle of [Mad Cow Disease] and see that this is a very strategic asset that’s been changed for the better.” —A.N.