Hongkong-based Shuanghui International Holdings Limited has entered into a debt financing agreement with various banks in order to fund its pending merger with U.S. meat producer Smithfield Foods Inc (SFD). Shuanghui has tied up with Bank of China Limited, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., Credit Agricole Corporate and Investment Bank, DBS Bank Ltd., Natixis, The Royal Bank of Scotland plc, Standard Chartered Bank (Hong Kong) Limited and Industrial & Commercial Bank of China (Asia) Limited to secure finance of approximately $4.0 billion. However, the closure of the merger is subject to approval by Smithfield shareholders and fulfillment of certain other customary closing conditions.
Per the deal signed on May 30, Shuanghui will acquire all of the outstanding shares of Smithfield for $34.00 per share, totaling $7.1 billion, including Smithfield’s debt. The deal will open the doors for Smithfield to expand its footprint in China taking advantage of Shuanghui's solid distribution network.
As far as Shuanghui is concerned, it will be able to meet the growing demand for pork in its domestic market by gaining control of Smithfield’s brands such as Smithfield, Armour and Farmland.
The deal is expected to close in the second half of 2013 and enjoys the support of local, state and national elected officials, industry labor unions, U.S. hog farmers, leading economic and international affairs academics and even U.S. based food industry peers. However, the transaction is yet to receive shareholder and related federal regulatory approvals.
Smithfield's shareholders are scheduled to vote on the transaction at a special shareholders meeting to be held on Sep 24, 2013. However, one of the largest shareholders of Smithfield, Starboard Value LP with beneficial ownership of approximately 5.7% is planning to vote against the acquisition deal as it is seeking other offers that would provide greater shareholder value to Smithfield’s shareholders.
Starboard has sent a letter to Smithfield’s board stating that it has received written interest from other parties to buy Smithfield's assets at a higher value than being offered under the current proposal. Starboard had also sent a letter to Smithfield's board of directors in June stating that it will be in the best interest of the shareholders if Smithfield sells off its various divisions like pork, hog production and international business individually rather than divesting the whole business all at once. Starboard also stated that the estimated value of the company is $9 billion – $10.8 billion or $44 – $55 per share, which is much higher than the deal price of $34 per share.
Prior to this buyout offer, Continental Grain Co., another major shareholder, had sent a letter to the company in March urging a split, in order to improve its underperforming business and shareholder returns. After the deal with Shuanghui, Continental Grain sold its entire stake in the company.
Not only this, some U.S. regulators have also voiced concerns that a takeover of Smithfield by a Chinese firm could hurt U.S. food safety and raise prices for American consumers. They are apprehensive of food safety practices in China.
Smithfield holds a Zacks Rank #3 (Hold). Meat producers like Pilgrim’s Pride Corp (PPC) with a Zacks Rank #1 (Strong Buy) and Tyson Food Inc (TSN) with a Zacks Rank #2 (Buy) are better placed and are worth considering. Another food company Dole Food Co Inc (DOLE) holds a Zacks Rank #2 (Buy).
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