Starboard Value LP, a large shareholder in Smithfield Foods Inc. (SFD), on Monday urged the pork producer to explore a breakup of the company instead of its planned takeover by Chinese meat company Shuanghui International Holdings Ltd.
The activist hedge fund noted that a "piece-by-piece sale" of the Smithfield's businesses could result in greater value to the company's shareholders than its proposed merger with Shanghui.
In May, Smithfield Foods said it agreed to be acquired by Shuanghui in a deal that values the pork processor at $7.1 billion, including the assumption of its debt. Under the deal that was approved by the boards of directors of both companies, Shuanghui will acquire all outstanding shares of Smithfield for $34 per share in cash. The purchase price represents a 31 percent premium over Smithfield's closing stock price on May 28, the last trading day prior to the announcement.
Shuanghui is a Hong Kong-based holding company that owns several global businesses including food, logistics and flavoring products. The company and its subsidiaries are the majority shareholders of China's largest meat processing enterprise Henan Shuanghui Investment & Development.
In a letter to Smithfield's board of directors, Starboad said Monday that its analysis indicated that a separation of Smithfield's businesses was entirely feasible and could be completed without significant tax leakage. Starboard, together with its affiliates, currently owns about 5.7 percent of the shares of Smithfield Foods. The hedge fund has been a shareholder of Smithfield since March 2013.
According to the activist investor, the proposed acquisition by Shanghui significantly understated a conservative sum-of-the-parts valuation of Smithfield, which it estimated to be worth between $9 billion and $10.8 billion after tax, or about $44 to $55 per share. Starboard noted that this represented a premium of about 29 to 62 percent to the $34 per share deal with Shanghui.
Starboad said its in-depth research and analysis on Smithfield clearly demonstrated that the company "could well be worth well in excess of $34.00 per share" if it had fully shopped its operating divisions to all potentially interested parties.
In its letter, Starboard said, "On a standalone basis, we had also identified opportunities for increased operational efficiencies that, particularly in the Pork division, could dramatically improve operating margins and profitability. Based on these factors, we felt Smithfield was an attractive investment with significant potential upside based on improved execution and a separation of the operating divisions."
Starboard said it initially invested in Smithfield because it believed the company was significantly undervalued and that there were opportunities within the control of management as well as the board of directors to substantially improve value for the benefit of shareholders.
Specifically, Starboard Value noted that its research indicated the sum-of-the-parts value of Smithfield's operating divisions, which include Hog Production, International, and Pork, was well in excess of the then-current trading price of the company.
Prior to Smithfield announcing its merger with Shanghui, another of its large shareholders Continental Grain Co. had filed a presentation highlighting the long history of underperformance at the hog producer and the steps it recommended to unlock value and improve shareholder returns.
Continental had suggested that Smithfield split into three independent companies by selling underperforming/highly volatile Hog Production as well as select European assets, and reinvesting the proceeds from asset sales in additional share buybacks. The shareholder also suggested instituting an annual dividend with a payout ratio in line with peers and restructuring Packaged Meats to reach profitability levels in line with peers.
In Monday's regular trading session, SFD is trading at $33.10, up $0.30 or 0.91 percent on a volume of 5.38 million shares.
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