Smithfield’s Hunger for Bacon Makes Sara Lee a Target: Real M&A

Smithfield Foods Inc. (SFD), owner of the world’s biggest hog slaughterhouse, is looking for deals in smoked ham, bacon and frozen meatballs. That may put Sara Lee Corp. (SLE) and People’s Food Holdings Ltd. (PFH) on its shopping list.

The Smithfield, Virginia-based company may seek purchases in the packaged-meats industry after canceling a plan this month to buy Spain’s Campofrio Food Group SA, Chief Executive Officer C. Larry Pope said June 16. Sara Lee, which is spinning off its beverage business to focus on meat, may be a target, said Fifth Third Asset Management. Smithfield could also profit from an acquisition in emerging markets such as China, where pork prices reached a three-year high as shortages of the nation’s most consumed meat persist, according to AgStar Financial Services.

While Smithfield reported a profit for the first time in three years last fiscal year, Pope has lost money for investors since becoming CEO in 2006. With earnings projected to fall this year and the highest debt-to-equity ratio of the biggest U.S. meat companies, Smithfield could pursue smaller deals in faster growing economies, said AgStar’s Mark Greenwood. Among meat producers under $1 billion in value, People’s Food has the most net cash and gets all its sales in China, the world’s biggest consumer of pork, according to data compiled by Bloomberg.

Smithfield is “trying to increase value by adding value to their brand,” said Greenwood, who oversees $1.4 billion in loans and leases to the hog industry and manages the swine portfolio at AgStar in Mankato, Minnesota. “In previous years they may have tried to grow more by raising more pigs. Having some extra value with a brand, you can at least charge more for that product than doing strictly commodity.”

Hog Processing

“They might look more international than domestic, especially because of the emerging markets,” he said. “If they could get something like that pulled off, you think that it would work to their benefit.”

Keira Lombardo, a spokeswoman at Smithfield, declined to comment and referred to the company’s long-term strategies for growth in its 2011 Farm to Market Conference presentation. In the presentation, Smithfield said it will take a “disciplined approach to acquiring branded packaged meats companies.”

The company makes more than 50 brands of pork products and has 52,400 employees globally, making it the world’s largest producer and processor of pork, its website said. Its facility in Tar Heel, North Carolina, is the largest hog slaughterhouse in the world, according to Steve Meyer, president of Paragon Economics in Des Moines, Iowa.

‘Potential Opportunities’

Pope said in an interview that Smithfield “would be interested and routinely look at potential opportunities to do something particularly on the packaged-meats side,” after pulling out of its negotiations to buy Madrid-based Campofrio.

Smithfield dropped the deal because of “adverse” economic conditions in Europe and a decline in its own stock price, Pope said in a June 3 statement. Prior to the announcement, Smithfield’s shares had slid 17 percent since the company said in April it was studying a plan to purchase a controlling stake.

Shares of Smithfield slipped 0.1 percent to $21.84 in New York today.

While Smithfield reversed two years of losses to report $521 million in net income in the 12 months ended April, analysts estimate the pork processor’s profit will decline 19 percent this year, according to data compiled by Bloomberg. Costs such as those to raise, feed and slaughter hogs, as well as those to produce meat products, are projected to rise.

Pope may still need acquisitions to boost returns.

Shareholder Value

Since he became CEO in September 2006, Smithfield’s shareholders lost 27 percent, including dividends, through last week, data compiled by Bloomberg show. Consumer staples stocks in the S&P MidCap 400 Index returned a total of 77 percent in the same period.

Tyson Foods Inc. (TSN), the biggest U.S. meat processor, returned 35 percent to its owners, while Hormel Foods Corp. (HRL), which makes Farmer John bacon and Spam lunchmeat, had a 74 percent increase.

An acquisition of Downers Grove, Illinois-based Sara Lee after it splits off its beverage division is one option for Smithfield, said Keith Wirtz, who helps oversee $18 billion as chief investment officer for Fifth Third in Cincinnati.

Sara Lee’s North American retail meats business had $2.9 billion in sales in the past 12 months and had an operating margin of 9.7 percent, data compiled by Bloomberg show. That’s higher than Smithfield, which generated 7.6 cents in operating income per dollar of sales, the data show.

If acquired, Sara Lee’s meats unit would increase sales at Smithfield’s packaged meats business by about 50 percent, data compiled by Bloomberg show.

‘Reinforce Their Desire’

In August 2006, Smithfield bought Sara Lee’s European meats arm for $614 million, including net debt, the data show.

“Smithfield would and should have an interest in the retail meats division of Sara Lee,” Wirtz said. “A move to expand in this category would reinforce their desire to move further upstream into higher margin activities.”

Mike Cummins, a Sara Lee spokesman, declined to comment. The company’s shares gained 1.2 percent to $18.82 today.

While Springdale, Arkansas-based Tyson may be a logical company for Smithfield to tie up with based on its operations, Tyson’s size would make it difficult for Smithfield to pull off without penalizing its own shareholders, according to Fiduciary Trust’s Michael Mullaney.

Smithfield’s limited cash would mean any deal would have to be financed through equity or debt, he said.

With a market value of $3.6 billion, Smithfield had $374.7 million in cash and $2.1 billion in debt as of April, according to data compiled by Bloomberg. Tyson, worth $7.1 billion, held $794 million in cash versus $2.5 billion in debt in March.

Debt Load

Smithfield’s debt-to-equity ratio, which measures how much debt a company has relative to its common shareholder equity, of 60 percent outstrips Tyson’s 44 percent. Austin, Minnesota-based Hormel has a ratio of 23 percent.

“Tyson makes sense from a product-line standpoint,” said Mullaney, who helps oversee $9.5 billion at Fiduciary Trust in Boston. “It does not make sense from a size standpoint. If they are trying to buy growth and diversification with a really well- run good company like a Tyson, they are going to wind up making a dilutive acquisition.”

Worth Sparkman, a spokesman at Tyson, declined to comment. The shares advanced 0.3 percent to $18.95 today.

Smithfield should consider buying smaller companies with related product lines that have a larger proportion of sales outside America, according to Mullaney.

People’s Food

In China, Smithfield could profit from acquiring People’s Food, a meat processor valued at $721 million. Based in Linyi in China’s Shandong province and traded in Singapore, People’s Food has increased sales 54 percent in the past three years, according to data compiled by Bloomberg. The company also has $246 million in net cash, the data show.

People’s Food generated about 41 percent of its sales from processed meats such as spicy sausages and ham, and the rest from fresh and frozen pork and poultry, including pig hearts, according to its website and data compiled by Bloomberg.

Pork prices in China, which accounts for half the world’s consumption of the meat according to the U.S. Department of Agriculture, may remain at their highest level since April 2008 as a shortage persists, Wang Xiaoyue, an analyst at Beijing Orient Agribusiness Consultant Ltd. said last week.

Demand is outstripping supply after local farmers reduced swine herds as prices declined almost 20 percent in the 15 months through March 2010, Wang said. It takes 12 months for a piglet to become mature enough for slaughter, he said.

That means Smithfield can profit from greater access in China through an acquisition, AgStar’s Greenwood said. People’s Food didn’t immediately respond to a request seeking comment.

The Chinese “consume more pork per capita than anyone in the world,” he said. With People’s Food, “at the end of the day, if it gets you market access and gets you entry into that market, it’s absolutely huge,” he said.

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; Danielle Kucera in New York at dkucera6@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.

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