Source:   Tom Johnston, MEATINGPLACE.COM, 5/29/09

JBS S.A. said Friday it has restructured its ownership of Five Rivers Cattle Feeding to reap the benefits and reduce the risks associated with the business.

JBS USA acquired 100 percent ownership of Five Rivers, an operator of 10 feedlots with an annual capacity of 1.5 million head of cattle, when it bought Smithfield Beef Group in October last year. Five Rivers was an integrated business that both owned and housed cattle fed in the company's feedlots.

In addition to access to a steady supply of fattened cattle for its beef processing plants, Five Rivers afforded JBS USA the ability to customize feeding programs for customers.

But full ownership of Five Rivers presented some challenges, including exposure to existing and future potential packer ban legislation and the significant costs associated with feeding thousands of cattle for an average of three to five months at a time.

Split ownership

Therefore, JBS has decided to split ownership of Five Rivers with J&F Oklahoma, with JBS USA owning the feedlot operation and J&F owning the cattle. Under the new structure, JBS Five Rivers, a subsidiary of JBS USA, now owns 10 feedlots and charges livestock owners a daily per-head fee to fatten their cattle and care for the animals until slaughter. Meanwhile, J&F owns up to 800,000 head of cattle on feed and pays JBS Five Rivers a market-based daily cattle feeding "hotel fee" for the care of its livestock.

J&F has entered into a three-year, $600 million revolving credit facility to finance up to 800,000 head of cattle on feed, which serve as a guarantee for this facility. Additionally, J&F has entered into a three-year, $200 million revolving credit agreement with JBS Five Rivers that mirrors the pricing terms under its bank revolver credit facility.

Two key commercial agreements govern the ownership split. Under a cattle supply and feeding agreement, JBS Five Rivers feeds and tends to cattle owned by J&F, and J&F pays JBS Five Rivers for the cost of feed and medicine at cost, plus a yardage fee. J&F also has agreed to maintain sufficient cattle on JBS Five Rivers' feed yards so that they are at least 85 percent full of cattle at all times.

Under a cattle purchase and sale agreement, J&F agrees to sell to JBS USA at least 500,000 cattle per year from 2009 through 2011, based on USDA pricing and a grading grid identical to the grid used for third parties.

JBS USA said the new arrangement allows the company to remain a spread operator and avoid the risk associated with owning cattle; provides JBS Five Rivers a relationship with a captive cattle supplier able to deliver a majority of animals to its feedlots; helps JBS USA avoid packer ban issues; and helps the company avoid the working capital burden related to owning cattle on feed.

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