U.S. pork processor
Smithfield Foods, Inc.
) has announced that the Committee on Foreign Investment in the
United States (CFIUS) will carry out a second phase 45-day review
of the proposed merger of Smithfield with Hongkong-based meat
processor, Shuanghui International Holdings Ltd, pursuant to the
Per the legislation, the Committee is in charge of reviewing
foreign acquisitions made by U.S. companies for potential
national security concerns. The 30-day review period starts from
the time a potential acquisition is reported. Following the end
of the 30-day period, CFIUS can exercise its option to extend the
term to a maximum of another 45 days.
The deal was signed on May 30, whereby Shuanghui agreed to
acquire all of the outstanding shares of Smithfield for $34.00
per share totaling $7.1 billion, including Smithfield's debt. The
deal will allow 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
that meet food safety standards.
However, the transaction is yet to receive shareholder and
related federal regulatory approvals. The main concern for U.S.
regulators is that the deal should not jeopardize the American
food supply chain and harm the entire U.S. pork industry as they
do not find Shuanghui's food safety practices in China
Smithfield's CEO has assured that the transaction will have no
impact on U.S. food supply. The company will continue to produce
pork maintaining highest food safety standards and abide by the
U.S. regulations. In addition, Smithfield stated that it will
continue its contracts with more than 2,000 family farmers even
after the merger. Smithfield believes that the deal will create
an opportunity for U.S. hog farmers to expand production.
Smithfield also assured U.S. regulators that there will be no
change in the company's management team and all the employees of
Smithfield will be retained, following the completion of the
deal. Virginia will continue to remain the headquarters of
Smithfield and C. Larry Pope will carry on in his
responsibilities as the company's president and CEO.
Both Smithfield and Shuanghui International have agreed to
cooperate with CFIUS and will not divulge details during the
review period. Both the companies expect the transaction to close
in the second half of 2013.
We note that Smithfield's results have been suffering since
the last few years as a result of higher grain costs and
declining pork demand. In addition, oversupply of hogs has
resulted in lower hog prices, which along with higher grain costs
lowered margins. This deal will prove to be a boon for Smithfield
as it will provide opportunities to increase the presence of its
brands in China. It will also be able to meet the rising demand
for pork in China, which accounts for about 50% of the world's
Smithfield holds a Zacks Rank #3 (Hold). Meat producers like
Pilgrim's Pride Corp
Sanderson Farms Inc
Tyson Foods Inc
) are better placed and are worth considering. While Sanderson
carries a Zacks Rank #1 (Strong Buy), Tyson and Pilgrim's Pride
hold a Zacks Rank #2 (Buy).
PILGRIMS PRIDE (PPC): Free Stock Analysis
SANDERSON FARMS (SAFM): Free Stock Analysis
SMITHFIELD FOOD (SFD): Free Stock Analysis
TYSON FOODS A (TSN): Free Stock Analysis
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