Smithfield Foods acquired by Chinese firm

Shareholders of Smithfield Foods got a huge payday Wednesday (May 29) when the pork company announced a blockbuster $7.1 billion acquisition by Shuanghui International Holdings, one of China’s largest meat companies.

It’s the largest acquisition of a U.S. company by a Chinese firm to date. The deal is expected to close in the second half of 2013.

It’s the first time a Chinese company has gone after a major player in the U.S. meat industry, but given the growing demand for pork in China, and Smithfield’s ability to deliver product without ractopamine (a feed ingredient banned by Chinese and Russian markets), the deal makes sense,” said Steve Kay, analyst and publisher of Cattle Buyers Weekly.

Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, Shuanghui will acquire all of the outstanding shares of Smithfield for $34 per share in cash. The purchase price represents a premium of approximately 31% over Smithfield's closing stock price on May 28, the last trading day prior to announcement.

Shares rose 25% to $32.48, up $6.50 on the morning’s news as regulatory concerns were raised by analysts who said Shuanghui has experienced serious food safety gaffes in recent months which is a concern given Smithfield’s presence as the largest pork processor in this country.

Company officials call the deal a win-win.

"This is a great transaction for all Smithfield stakeholders, as well as for American farmers and U.S. agriculture," said C. Larry Pope, CEO and president of Smithfield. "We have established Smithfield as the world's leading and most trusted vertically integrated pork processor and hog producer, and are excited that Shuanghui recognizes our best-in-class operations, our outstanding food safety practices and our 46,000 hard-working and dedicated employees. It will be business as usual — only better — at Smithfield.”

Pope does not anticipate any changes in Smithfield’s business operations in the United States and throughout the world.

"This is not a strategy to import Chinese pork into the United States … this is exporting America to the world,” he added.

"People have this belief … that everything in America is made in China. Open your refrigerator door, look inside. Nothing in there is made in China because American agriculture is the most competitive and efficient in the world. This is the one place America can absolutely compete," Pope said during the conference call.

Shuanghui chairman Wan Long said the two companies bring rich histories and decades of processing experience to the table.

“Smithfield is a leader in our industry and together we will be able to meet the growing demand in China for pork by importing high-quality meat products from the United States, while continuing to serve markets in the United States and around the world. The combination creates a company with an unmatched set of assets, products and geographic reach," Long said.

The two companies have had a working relationship for several years and Shuanghui said it will continue to work with American farmers, producers and suppliers who have been critical to Smithfield's success.

The deal must pass regulatory muster and one group, is already claiming Smithfield’s board may have breached their fiduciary duties in connection with the proposed acquisition. A shareholder rights law firm, Johnson & Weaver,  is investigating whether the board of directors breached their fiduciary duties to stockholders by failing to satisfactorily shop the company before entering into this agreement.

Jim Baker, lead analyst for Johnson & Weaver, said "Shuanghui International’s offer appears to be inadequate and not in the best interest of Smithfield Foods shareholders."

Baker noted that Smithfield Foods is trading at a low multiple relative to this year’s expected earnings. Additionally, one analyst has a target price of $48.00, greater than the $34.00 buyout price.

The second-largest shareholder for Smithfield Foods recently asked that the world's largest pork producer to consider splitting up the company. Last month Continental Grain Co. filed a presentation with the Securities and Exchange Commission furthering its recommendation. Continental said Smithfield might make more money if it splits up into three units — a hog producing unit, fresh pork and packaged meat business and an international company.

Following that letter, Smithfield said in a statement that it would review the suggestions "in due course."

Pope said Wednesday, "This transaction provides Smithfield shareholders with significant and immediate cash value for their investment, and ensures that Smithfield will continue to execute on its strategic priorities while maintaining our brand excellence, community involvement, and our commitment to environmental stewardship and animal welfare. Our board of directors is pleased with the outcome of the process we followed leading to this transaction, and we unanimously believe that this combination with Shuanghui is in the best interests of the Company, our shareholders and all Smithfield stakeholders."

The deal allows Pope to continue as CEO and president of Smithfield, and the management teams and workforce of Smithfield's independent operating companies will continue in place after the transaction.

The closing of the transaction is subject to certain conditions, including, among others, approval by Smithfield's shareholders, the receipt of approval under applicable U.S. and specified foreign antitrust and anti-competition laws, The Committee on Foreign Investment in the United States and other customary closing conditions.

Through nine months of this year Smithfield has posted net profits of $281.8 million, up from $154.1 in the year-ago period.

Smithfield is a competitor to Tyson Foods for pork sales across the globe. Tyson’s shares also rose on the acquisition news trading up roughly 1.9% at $25.27 on Wednesday morning.