CHICAGO — Starboard Value, an investor in Smithfield Foods, approached buyout firms and meat processors to encourage them to form a bidding group to derail a Chinese takeover, said two people familiar with the process.
The activist investor is challenging Hong Kong’s Shuanghui International Holdings Ltd., which agreed in May to buy Smithfield for $4.7 billion. Under Starboard’s plan, the group would bid together and break up Smithfield after the takeover, said the people, who asked not to be named because the negotiations are private.
Starboard, led by Chief Executive Officer Jeffrey Smith, has argued for the past two months that the world’s biggest hog producer could obtain a much higher price through a split. “As far down the road as Smithfield is, it’s going to be hard to turn that around,” Michael Cook Sr., CEO of SouthernSun Asset Management in Memphis, which holds a 3.5 percent stake in Smithfield, said in a telephone interview. If a rival bid was “marginally better it would be hard to pull off. The economics would have to be really good.”
Starboard holds a 5.7 percent stake in Smithfield, according to a July 12 regulatory filing. Shuanghui agreed to pay $34 a share for Smithfield.
Spokesmen at Smithfield and Shuanghui declined to comment. 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.
Shuanghui, whose takeover proposal is currently under review by U.S. regulators, agreed to buy Smithfield as China’s demand for pork and greater food safety increases. A fresh offer may face less regulatory scrutiny, as politicians have urged the Committee on Foreign Investment in the U.S. to take a closer look at Shuanghui’s bid. Smithfield said July 24 that CFIUS is conducting a 45-day review of the takeover after concluding the initial 30-day review.
At the $34 offer price and including debt, Shuanghui is paying about $7 billion, or 7.4 times Smithfield’s earnings before interest, taxes, depreciation and amortization, according to data compiled at the time of the bid. That compares with the $44 to $55 a share that Starboard has said Smithfield could fetch in a breakup. The firm said last month it hired Moelis & Co. and BDA Advisors Inc. to advise on the process with Smithfield.
Another shareholder that lobbied Smithfield to consider a breakup, Continental Grain Co., was satisfied with Shuanghui’s offer and said in June that it would exit its stake following the proposal. The investor held a 5.8 percent stake at the time of the bid.
Smithfield said in a July regulatory filing that the board evaluated breaking up the company via carve-outs or spinoffs. The board concluded “such restructuring alternatives were not in the best interests of Smithfield and its shareholders because, among other things, Smithfield’s hog production segment created efficiencies and synergies.”