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Smithfield Shareholder Sells Stake - Analyst Blog

Posted: 6/5/2013 12:29:00 PM
Referenced Stocks: FLO;PPC;SAFM;SFD

Continental Grain Co., one of the largest shareholders of U.S. pork processor Smithfield Foods Inc. ( SFD ) has agreed to sell its entire stake in the company, after Smithfield agreed to its buyout by Hongkong-based meat processor Shuanghui International Holdings Ltd. Per the deal finalized last week, Shuanghui will acquire all of the outstanding shares of Smithfield for $34.00 per share totaling $7.1 billion, including Smithfield's debt.

Prior to this buyout offer, Continental sent Smithfield a letter in March urging a split, in order to improve its underperforming business and shareholder returns. Notably, Smithfield had been struggling with its operations since the past few years as a result of higher grain costs. In addition, oversupply of hogs resulted in lower hog prices, which along with higher grain costs led to margin declines. Smithfield was also uncertain about the performance of its Hog Production segment in the upcoming quarters.

Continental had suggested that Smithfield be split into three independent companies by divesting the underperforming and volatile Hog Production business and selected European assets. The proceeds from asset sales could then be reinvested to buy back more shares. The suggestion also involved restructuring of the Packaged Meats segment.

Following its buyout, Smithfield will be able to expand its footprint in China taking advantage of Shuanghui's solid distribution network. On the other hand, the deal will allow Shuanghui, which is a leading pork producer in China, to meet the growing demand for pork in China by gaining control of Smithfield's brands, such as Smithfield, Armour and Farmland that meet food safety standards. The combined company will thus have greater access to the aggressively growing Chinese and U.S. pork industries. The deal is expected to close in the second half of 2013, once it receives shareholder and related federal regulatory approvals.

Following the completion of the deal, Smithfield will not trade publicly and will become a wholly-owned subsidiary of Shuanghui International Holdings Limited.  It will operate as Smithfield Foods. There will be no change in the company's management team and all the employees of Smithfield will be retained. 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 chief executive officer.

Smithfield holds a Zacks Rank #3 (Hold). Meat producers like Pilgrim's Pride Corp ( PPC ) and Sanderson Farms Inc ( SAFM ), carrying a Zacks Rank #1 (Strong Buy), are better placed and are worth considering. Another consumer staple company, which is worth considering is Flower Foods Inc ( FLO ). It carries a Zacks Rank #1.

FLOWERS FOODS (FLO): Free Stock Analysis Report

PILGRIMS PRIDE (PPC): Free Stock Analysis Report

SANDERSON FARMS (SAFM): Free Stock Analysis Report

SMITHFIELD FOOD (SFD): Free Stock Analysis Report

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