June 19, 2013

Starboard urges Smithfield breakup over buyout

 

 

 

StarboardValue LP urged Smithfield to explore a breakup rather than a planned US$4.7 billion takeover by China's Shuanghui International.

 

The activist investor, now Smithfield's biggest shareholder with a 5.7% stake, said Smithfield could be worth 29% to 64% more than the US$34 per share offered by Shuanghui if it split up and shopped its hog production, pork and international units separately.

 

Some US lawmakers have expressed concerns about food safety implications of the Shuanghui proposal, which would be a Chinese company's largest takeover to date of a US firm.

 

Stock market reaction to the breakup proposal was muted. Smithfield shares rose 0.9% to US$33.08, well below the valuation of US$44 to US$55 per share Starboard laid out in a letter to Smithfield's board, dated June 17.

 

"Continental Grain has made this case for several years and has not gotten anywhere with it," said Moody's analyst Brian Weddington. Continental, which had pushed for a split-up, sold its Smithfield shares after the Shuanghui deal was announced.

 

Analysts said Shuanghui, a pork processor, is most interested in Smithfield's hog processing unit, the most volatile of the three divisions. China is keen to secure a reliable pork supply for its burgeoning population.

 

Tom Graves, an analyst with S&P Capital IQ, said there is a basis for Starboard to seek a higher valuation in a breakup since the packaged food business is the most attractive.

 

"But we think the high end of Starboard's sum-of-the-parts valuation range is much higher than is likely to be realised," said Graves. He raised his price target to US$34 from US$33, reflecting an expectation that the Shuanghui deal will close.

 

Smithfield reaffirmed its recommendation that shareholders approve the deal, saying it had already considered different separation scenarios.

 

"The board unanimously believes that the transaction with Shuanghui is in the best interests of the company, its shareholders and all Smithfield stakeholders," Smithfield said in a statement.

 

US Senate Agriculture Committee Chairwoman Debbie Stabenow, Democrat of Michigan, has said federal agencies considering the merger "must take China's and Shuanghui's troubling track record on food safety into account."

 

The companies insist the transaction was focused on exporting US pork to China, not importing meat from China.

 

Starboard said it believes there are numerous interested parties for each Smithfield division and it "is looking to identify and engage in discussions with any third parties who may be interested." It did not identify any possible bidders.

 

Last month, Thailand's Charoen Pokphand Foods Pcl, controlled by billionaire Dhanin Chearavanont, said it considered bidding for Smithfield. Meat industry observers say other possible suitors for parts of Smithfield include Hillshire Brands Co, Tyson Foods Inc and Brazil's JBS SA . None of the companies has said they were interested.

 

Starboard's stake in Smithfield puts it ahead of Vanguard Group Inc, which owned 4.7% of the Virginia-based company as of March 31, according to Thomson Reuters data. A spokesman for Shuanghui declined to comment. Continental Grain was not immediately available.