Investor urges Smithfield to consider breakup

Bloomberg NewsJune 17, 2013 

— Smithfield Foods , the hog producer that agreed to a $4.7 billion acquisition by Shuanghui International Holdings last month, was urged by activist investor Starboard Value to consider splitting itself up instead.

A breakup may value the world’s largest hog and pork producer at about $44 to $55 a share, the investor, which said it holds a 5.7 percent stake in the company, wrote in a letter to Smithfield’s board Monday. Hong Kong-based Shuanghui agreed in May to pay $34 a share for the Smithfield, Va.-based company.

“We question whether the board gave sufficient consideration to a sale of the divisions in separate transactions, or whether it focused primarily on an all-cash transaction for the company as a whole,” Starboard Chief Executive Officer Jeffrey C. Smith said in the letter.

In a statement, Smithfield Foods said Monday that it would review Starboard’s letter and was committed to maximizing shareholder value. About 10,000 of Smithfield’s 46,000 worldwide employees are in North Carolina, where the company has a slaughterhouse in Tar Heel and packaging plants in Kinston, Clinton and Wilson.

Smithfield faced similar demands in March from shareholder Continental Grain Co. as rising animal-feed costs made hog production unprofitable. Continental said in April a breakup into three businesses would achieve a stock price of $40 within three years. It subsequently backed the bid from Shuanghui and said it will exit its holding after the transaction.

Starboard estimates the pretax value of the hog unit to be between $1.9 billion and $2.3 billion; the international operations to be between $1.3 billion and $1.5 billion; and the pork division should be worth between $6.2 billion and $7.9 billion.

“It seems high on the hog production side,” Ann Gurkin, a Richmond, Va.-based analyst for Davenport, said in a telephone interview Monday.

Gurkin in a March 8 report estimated the sum of the parts value for the whole company at $8.9 billion including net debt, with the hog unit worth $702 million, international operations worth $990 million and the pork division worth $7.2 billion.

Shuanghui may be the only remaining buyer for Smithfield after Charoen Pokphand Foods of Thailand and JBS of Brazil both walked from the sale process, said Thomas Sandell. His investment firm, Sandell Asset Management Corp., acquired 150,000 Smithfield shares in the first quarter for about $26 apiece, he said.

The break-up fee climbs after the go-shop period expires, said Sandell, who hadn’t yet read Starboard’s proposal.

“That might make it a little more onerous for other parties to get in here,” he said Monday on Bloomberg Television’s “Market Makers” with Erik Schatzker and Sara Eisen. There’s “a little bit of a concern that there might just be one buyer.”

Starboard, a New York-based investment adviser that has pushed for changes at retailer Office Depot and Internet company AOL in the past year, said it’s not necessarily opposing the Shuanghui takeover.

“We believe the proposed merger goes a long way towards unlocking the intrinsic value of the company for shareholders,” Smith said in the letter. “We would be remiss, however, to let an opportunity slip by to determine whether the company could realize even greater value.”

Smithfield has attracted interest from China as the country’s growing middle class boosts pork consumption. A takeover by Shuanghui would be the biggest Chinese purchase of a U.S. company and follows other global food and agriculture- related acquisitions. Smithfield and Shuanghui said May 29 they expected the deal to close this year.

Smithfield’s livestock unit produces about 15.8 million hogs a year, according to the company’s website. It owns 460 farms and has contracts with 2,100 others across 12 U.S. states.

Staff writer David Bracken contributed.

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