Shuanghui International Holdings Ltd., China’s biggest pork producer, agreed to acquire Smithfield Foods Inc. for about $4.72 billion to boost supplies for the nation that’s the biggest consumer of the meat.
Closely held Shuanghui, parent of Henan Shuanghui Investment & Development Co., will pay $34 a share for the Smithfield, Virginia-based producer, the companies said today in a statement. The offer is 31 percent more than yesterday’s closing share price.
China’s consumption of pork is rising with the expansion of its middle class while questions are being asked about the safety of the country’s food supply. Smithfield’s livestock unit is the world’s largest hog producer, raising about 15.8 million a year, according to the company’s website. It owns 460 farms and has contracts with 2,100 others across 12 U.S. states.
“China is a large and growing market,” Smithfield Chief Executive Officer C. Larry Pope said in a conference call. “Asia as a whole is a tremendous and growing export opportunity for Smithfield.”
Valued at $7.1 billion including debt, the deal would be the largest for a meat producer and the biggest Chinese takeover of a U.S. company, according to data compiled by Bloomberg. It’s subject to approval from Smithfield shareholders and regulators including the Committee on Foreign Investment in the U.S., and is expected to close in the second half.
“On the one hand, pork is not directly an issue of national security, as defense or telecom might be,” Ken Goldman, a New York-based analyst for JPMorgan Chase & Co. who has a hold rating on the shares, said in a report today.
“On the other hand, if CFIUS comes to believe that Chinese ownership of the U.S.’s largest hog farmer and pork supplier presents a food supply risk, then it may have a heightened concern,” he said.
Smithfield rose 29 percent to $32.65 at 1:28 p.m. in New York.
The merger agreement has a limited “go-shop” clause, Pope said in a phone interview. He will continue as CEO and president of Smithfield.
While the Shuanghui deal doesn’t pose a national security risk, the CFIUS will give it a “good study,” he said. The takeover will open up new Asian markets for Smithfield’s pork products and help the company’s new owners learn about safe ways to raise livestock and produce meat, Pope said.
Smithfield has underperformed some of its biggest U.S. rivals because its farms have seen rising costs for feed ingredients such as corn and soybeans. Last year, the U.S. experienced its worst drought since the 1930s, which pushed crop prices to a record.
The shares have declined about 18 percent in the past five years before today, while competing U.S. meat producers Hormel Food Corp. and Tyson Foods Inc. climbed 118 percent and and 37 percent respectively in the same period.
Smithfield’s hog farms have held back the company’s performance, shareholder Continental Grain Co. said in March. The meat company should consider splitting up its packaged meats, international operations and livestock businesses, Continental said in a March 7 letter. It also called for the company to start paying a dividend and to add several new directors to the board.
Smithfield has been talking to Shuanghui about a deal since late last year and Continental’s letter “probably accelerated” the discussions, Pope said today.
Despite the call to split up Smithfield, the company had already successfully accessed the Chinese market, Tim Ramey, a Lake Oswego, Oregon-based analyst for D.A. Davidson & Co. who has a buy rating on the shares, said in a report today. That’s because of the structure of its business, which spans raising pigs to packaging bacon, he said.
“This deal is a clear vindication of the Smithfield strategy of vertically integrated pork operations,” Ramey said.
China was the third-biggest buyer of U.S. pork in 2012, after Japan and Mexico, according to U.S. Department of Agriculture data.
Chinese annual per-capita meat consumption is about 40 kilograms (88 pounds) and will likely double in the next few years as the country catches up with more developed countries, Henan Shuanghui Investment President Zhang Taixi said in March.
The takeover will be financed through a combination of cash, the rollover of existing Smithfield debt, and additional debt that has been committed by Morgan Stanley and a group of banks, according to the statement.
Barclays Plc is Smithfield’s financial adviser and Simpson Thacher & Bartlett LLP and McGuireWoods LLP are its legal counsel on the deal. Morgan Stanley is the financial adviser for Shuanghui and Paul Hastings LLP and Troutman Sanders LLP are serving the company’s legal counsel.
The Shuanghui offer values Smithfield at about 7.4 times annual earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That compares with a median Ebitda multiple of 7 for 20 similar deals valued at $100 million or more that were announced in the past five years, the data show.
“Any number of companies could buy Smithfield at a premium to the $34 bid and have an accretive transaction,” Ramey said. “We would not be surprised to see a higher offer.”