Starboard Value LP, an investor in Smithfield Foods Inc. (SFD), approached buyout firms and meat processors to encourage them to form a bidding group to derail a Chinese takeover, said two people familiar with the process.
The activist investor is challenging Hong Kong’s Shuanghui International Holdings Ltd., which agreed in May to buy Smithfield for $4.7 billion. Under Starboard’s plan, the group would bid together and break up Smithfield after the takeover, said the people, who asked not to be named because the negotiations are private.
Starboard, led by Chief Executive Officer Jeffrey Smith, has argued for the past two months that the world’s biggest hog producer could obtain a much higher price through a split. The firm approached meat processors including Tyson Foods Inc. (TSN) about a possible group transaction, said one of the people. Starboard may present a proposal to Smithfield’s board within a month, that person said.
“As far down the road as Smithfield is, it’s going to be hard to turn that around,” Michael Cook Sr., CEO of SouthernSun Asset Management LLC in Memphis, which holds a 3.5 percent stake in Smithfield, said in a telephone interview. If a rival bid was “marginally better it would be hard to pull off. The economics would have to be really good.”
Starboard holds a 5.7 percent stake in Smithfield, according to a July 12 regulatory filing. The activist firm also made overtures to potential financial investors such as KKR & Co. and Blackstone Group LP (BX), the person said. No consortium has yet been finalized and a rival deal may not emerge, said the other person.
Spokesmen at Smithfield, Shuanghui, Blackstone and Tyson declined to comment. Representatives at Starboard and KKR didn’t immediately reply to requests for comment.
Shuanghui, whose takeover proposal is currently under review by U.S. regulators, agreed to buy Smithfield as China’s demand for pork and greater food safety increases. A fresh offer may face less regulatory scrutiny, as politicians have urged the Committee on Foreign Investment in the U.S. to take a closer look at Shuanghui’s bid. Smithfield said July 24 that CFIUS is conducting a 45-day review of the takeover after concluding the initial 30-day review.
At the $34 offer price and including debt, Shuanghui is paying about $7 billion, or 7.4 times Smithfield’s earnings before interest, taxes, depreciation and amortization, according to data compiled at the time of the bid. That compares with the $44 to $55 a share that Starboard has said Smithfield could fetch in a breakup. The firm said last month it hired Moelis & Co. and BDA Advisors Inc. to advise on the process with Smithfield.
Another shareholder that lobbied Smithfield to consider a breakup, Continental Grain Co., was satisfied with Shuanghui’s offer and said in June that it would exit its stake following the proposal. The investor held a 5.8 percent stake at the time of the bid.
Smithfield said in a July regulatory filing that the board evaluated breaking up the company via carve-outs or spinoffs. The board concluded “such restructuring alternatives were not in the best interests of Smithfield and its shareholders because, among other things, Smithfield’s hog production segment created efficiencies and synergies.”
Some overseas meat processors also have been approached by Starboard, according to one person.
Days before the Shuanghui deal was announced, Brazilian beef processor JBS SA (JBSS3) proposed a bid of $33.50 a share to Smithfield management and its advisers, with the possibility of a higher bid following due diligence, said another person familiar with the matter. JBS wasn’t willing to retain Smithfield’s management, and never heard from Smithfield again, this person said.
An official at JBS, who asked not to be named owing to company policy, said there would be no comment beyond CEO Wesley Batista’s previous statements. In June, Batista said in an interview in Sao Paulo that his company decided against a bid for Smithfield because the price was too high.