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June 17, 2013

US: Smithfield investor claims Shuanghui offer “undervalues” pork group

Investment firm Starboard Value, which holds a 5.7% stake in Smithfield Foods, has suggested the proposed takeover of the US pork processor by China's Shuanghui International "significantly" undervalues the company.

Investment firm Starboard Value, which holds a 5.7% stake in Smithfield Foods, has suggested the proposed takeover of the US pork processor by China’s Shuanghui International “significantly” undervalues the company.

Shuanghui has offered $34 a share for Smithfield, which represents a 31% premium on Smithfield’s closing price the day before the acquisition was announced on 29 May.

In a letter to the Smithfield board, reviewed by just-food, Starboard conceded the price “goes a long way” towards “closing the gap between the pre-deal market value of Smithfield and the intrinsic value of the business”.

However, Starboard argued: “We believe the proposed merger still significantly understates a conservative sum-of-the-parts valuation of the company.”

Starboard estimates Smithfield could fetch between $9bn and $10.8bn after tax, equating to $44-55 per share and representing a premium of up to 62% on Shuanghui’s offer.

Smithfield is made up of three divisions: hog production, international and US pork. According to Starboard, the disparate nature of these businesses means the company would likely fetch a better price if it was split up and then sold off.

“For long before the announced transaction, public investors have applied a conglomerate discount to the value of Smithfield because of the disparate nature of the divisions and the vastly different operational and financial characteristics of these businesses. We believe the price offered by Shuanghui reflects such a conglomerate discount, and a better outcome may have been achieved had the company explored a separation and sale of the operating divisions individually.”

While Smithfield management has lauded the benefits of being a vertically-integrated pork processor, Starboard suggested its businesses would actually benefit from operating on a stand-alone basis, and could then be easily integrated into another 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, which we believe would entail a much more limited universe of potential buyers.”

Starboard suggested Smithfield’s deal with Shanghui meant the US group’s could not seek better offers for the company or speaking to those that may want to be parts of the business.

“We fully understand that under the merger agreement, Smithfield is contractually prohibited from seeking superior offers for the company or from contacting third parties who may be interested in acquiring certain of the company’s operating divisions,” Starboard said. However, the shareholder said it would contact financial and strategic investors that could be interested in buying the company’s separate divisions.

“We are looking to identify and engage in discussions with any third parties who may be interested in acquiring any of Smithfield’s operating units…. If interested acquirors emerge whose offers for the company’s individual units represent in the aggregate superior value than the proposed merger, we believe the board must consider a “change in company board recommendation” under the terms of the merger agreement.”

Under the deal between Smithfield and Shanghui, the US group can “solicit and encourage” alternative bids from two unnamed third parties that did put forward proposals before its deal with the Chinese firm was signed.

In the wake of the Smithfield-Shuanghui deal being announced, Thai food group Charoen Pokphand Foods told just-food it had signed a non-disclosure agreement with the US group but said it did not have enough time to pursue its interest in the company. Reports also said Brazil’s JBS was preparing a bid, although the company did not confirm its interest.

However, the agreement between Smithfield and Shuanghui adds: “With respect to third parties other than the pre-existing Bidders, the company is subject to customary no-shop restrictions on the ability of the company to solicit third-party proposals relating to alternative transactions or provide information or enter into discussions in connection with alternative transactions, subject to certain exceptions to permit the company’s board of  directors to comply with its fiduciary duties.”

The proposed acquisition of Smithfield by Shuanghui has been unanimously backed by the US group’s board but it is still pending shareholder approval and regulatory clearance.

Smithfield’s largest – and previously critical – shareholder, Continental Grain, has already thrown its weight behind the deal suggesting it is “satisfied” with the return offered.

Smithfield was unavailable for immediate comment, while Starboard declined to comment beyond the issued set out in its communications with Smithfield.

However, a source close to the situation told just-food Starboard believes there are indeed parties that would be interested in buying each of Smithfield’s divisions. While it is understood the investor is not opposed to the deal in principle, the group aims to bring these disparate parties together to explore further value-creation opportunities.

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