Meat processor Smithfield Foods, Inc. (SFD) said on Monday that Groupe Smithfield Holdings, S.L., its joint venture with funds controlled by Oaktree Capital Management LLC, has agreed to merge with Campofrio Alimentacion, S.A., a processed meats company in Spain. Under the deal, Campofrio would issue shares to Smithfield Foods and Oaktree in exchange for all of the membership interests in Groupe Smithfield.
On completion of the merger, Smithfield, which currently owns 24% of Campofrio, would own 36% of the combined company. Oaktree will own 24% of the new company.
The merger will result in the formation of a pan-European company in the processed meats sector with sales of more than $3 billion, with leading market shares in Spain, France, Belgium and Portugal, and a strong presence in The Netherlands, Romania and Russia. The merger is expected to close in Smithfield's third fiscal quarter and is subject to a takeover bid exemption by the Spanish securities regulator, CNMV.
The combined company would be headquartered in Madrid, and would continue to operate under the Campofrio name. Campofrio products are distributed in over 40 countries, while Groupe Smithfield has a presence in seven major markets in Europe. Both the companies expect to achieve synergy opportunities in sourcing, manufacturing and capital expenditures, with synergies addressed to reach over Euro 40 million yearly from 2012.
Commenting on the deal, Larry Pope, president and chief executive officer of Smithfield said, "The two companies are very complementary and merging them will provide many significant synergy opportunities. There is a clear correlation between an operation's size and profitability in European processed meats and this merger will make the combined Campofrio-Groupe Smithfield a much stronger company."
Robert Sharpe, president and chief executive officer of Groupe Smithfield said, "This transaction is an unique opportunity to become the leading player in the packaged meats market, almost three times larger than our closest competitor, with a clear success story supported by leading brands in every market in which we operate."
Sharpe noted that Campofrio's know-how in marketing and innovation as well as its strong position in the branded products segment in Spain along with Groupe Smithfield's expertise in sourcing and productivity and its presence in France would lead to a winning combination.
Groupe Smithfield was formed in 2006 through the combination of Smithfield Foods' Groupe Jean Caby subsidiary and the former Sara Lee European Meats business.
Smithfield said that after the merger, it would continue to account for its investment in Campofrio under the equity method of accounting.
Separately, Campofrio said that the merger would create the leading European processed meat company and one of the five largest worldwide, with turnover of Euro2.1 billion and Euro190 million of EBITDA, according to pro-forma combined figures as of December 2007. The company noted that the merged entity would remain listed on the Madrid and Barcelona Stock Exchange.
Further, Campofrio said that the merger is subject to an exemption to be issued by the CNMV, allowing Smithfield Foods to maintain a shareholding in excess of 30% without having to launch a mandatory takeover bid for 100% of Campofrio.
The new group Campofrio will be led by Pedro Ballve, who will remain President of the board of the company and Robert Sharpe, who will become the Chief Executive Officer. The board of directors of the company will comprise of nine members, pending shareholders' approval. Pedro Ballve will assume the role of President, while two members would represent Smithfield Foods and two would represent Oaktree Capital. One member would represent Cartera Nuvalia of the Diaz family and three would be independent members.
During a three-year stand-still period, Smithfield Foods has agreed not to exercise the voting rights exceeding 30% and not to appoint more than half of the members of the board of Campofrio. The company has also agreed not to increase its indirect shareholding stake in Campofrio, except for certain authorized events.
Following the end of the three-year stand-still period, Smithfield Foods has committed to launch a tender offer for 100% of Campofrio shares if Smithfield Foods increases its holding in Campofrio or appoints more than half of the members of the board.
With sales of $11 billion, Smithfield Foods is the leading processor and marketer of fresh pork and packaged meats in the United States, as well as the largest producer of hogs. For the recent fourth quarter, the company reported a decline in its profit for the fourth quarter to $2.4 million, or $0.02 per share, from $37.1 million, or $0.33 per share, a year ago, hurt by higher grain prices and lower hog prices. However, quarterly sales grew to $2.9 billion from $2.4 billion in the previous year. The company benefited from exceptional results in the pork market that was offset by extremely poor conditions in hog production.
Campofrio Group's turnover was Euro 968 million in 2007, while EBITDA for the same period was Euro 90 million. The company's market capitalization was Euro 480 million on June 27, 2008.
In Monday's regular trading session, SFD is trading at $19.73, down $0.12 or 0.60% on a volume of 3.30 million shares. The stock has been trading in a range of $19.17-$35.79 in the past 52 weeks.
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