Smithfield Traders Wager Shuanghui’s Deal Wins: Real M&A

Investors in Smithfield Foods Inc. are betting Shuanghui International Holdings Ltd. will complete the biggest Chinese takeover of a U.S. company, overcoming a national security review and prevailing over potential rival bidders.

Shuanghui agreed to pay about $7 billion including debt assumption, or 7.4 times profit for the world’s largest hog and pork producer. That’s also the median for similar-sized industry deals during the past decade, according to data compiled by Bloomberg. Stephens Inc. said the $34-a-share offer for the Smithfield, Virginia-based company, which is higher than the stock has traded since 2007, is fair.

Smithfield yesterday closed 3.7 percent below the offer from China’s biggest pork processor, signaling traders doubt that another bid will materialize, according to Wall Street Access Corp. While people familiar with the matter said Smithfield has 30 days to continue talks with possible buyers Charoen Pokphand Foods Pcl and JBS SA, the former may lack the financial wherewithal to top Shuanghui’s offer and the latter may face antitrust hurdles, BB&T Corp. said.

“The most likely outcome is that the deal closes,” Peter Lobravico, a New York-based vice president of merger arbitrage trading and sales at Wall Street Access, said in a telephone interview. “The stock is telling you that there’s skepticism out there that JBS or CP Foods are going to come in with a rival bid.”

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Smithfield Chief Executive Officer C. Larry Pope declined to comment on other potential bidders during a May 29 interview. Keira Lombardo, a spokeswoman for the company, wouldn’t elaborate when reached by e-mail yesterday.

Shuanghui Chairman Wan Long said in an interview today that the company may raise its bid for Smithfield to match other offers if necessary. Smithfield shares rose 0.6 percent to $32.94 today.

The proposed $34 purchase price valued Smithfield at 31 percent more than its closing price on May 28, the day before the deal was announced. It also gives Smithfield an enterprise value of about $7 billion, or 7.4 times the company’s earnings before interest, taxes, depreciation and amortization in the last 12 months, data compiled by Bloomberg show. That’s the median Ebitda multiple paid in meat producer deals larger than $500 million during the past 10 years, the data show.

Shuanghui’s offer is fair, Farha Aslam, a New York-based analyst for Stephens, said in a May 30 report.

Fueling Growth

Shuanghui, based in Hong Kong, agreed to the deal amid forecasts that the Asia-Pacific region will drive the majority of growth in worldwide meat demand this decade. The Organization for Economic Cooperation and Development says that part of the world will account for 56 percent of the increase in global consumption through 2021, as compared with the base period of 2009 through 2011.

Smithfield produced 15.8 million hogs in fiscal 2012, owns 460 farms and has contracts with 2,100 other farms in 12 U.S. states, according to the company’s website.

“Shuanghui is set to benefit over the long run as it gets advanced technologies and talents from Smithfield,” Zhu Weihua, a Shenzhen-based analyst with China Merchants Securities Co., said by phone.

Shuanghui and Smithfield said the deal should be completed this year, pending approval from the Committee on Foreign Investment in the U.S., or CFIUS.

CFIUS has blocked at least three transactions in the past four years to prevent Chinese companies from gaining control of assets near military facilities. Republican Senator Charles Grassley of Iowa, the largest hog-producing state, said the U.S. Department of Justice should take a “close look.”

No Hurdle

The regulatory approval process isn’t likely to derail the deal, according to Credit Suisse Group AG’s Robert Moskow.

“Politics are always an unknown factor, but we do not think this represents a major hurdle,” Moskow, a New York-based analyst, said in a report on May 29. He estimates that Smithfield represents about 26 percent of U.S. pork processing capacity.

Smithfield rose as high as $33.96 on May 29 after Bloomberg News reported that CP Foods and JBS had courted the hog producer prior to Shuanghui’s bid. The stock closed at $32.74 yesterday.

The gap between the stock price and Shuanghui’s offer is wider than usual because of the potential regulatory risk tied to a Chinese buyer, said Keith Moore, an event-driven strategist for Stamford, Connecticut-based MKM Partners LLC. Still, the fact that Smithfield is trading below $34 signals investors are wagering no other suitor will emerge, he said.

‘Headline Risk’

“You have headline risk in this deal from the point of view that there will be any number of politicians that over the next five months will come out trying to stir the public up saying, ‘We shouldn’t let the Chinese buy our food producers,’” Moore said in a phone interview. “It’s not programmed in that there will be another bid.”

While Smithfield can’t actively seek better offers, the merger agreement permits it to respond to unsolicited bids that are superior to Shuanghui’s. CP Foods, which is based in Bangkok, and Sao Paulo-based JBS were preparing bids for Smithfield before it agreed to Shuanghui’s offer, said people familiar with the matter, who asked not to be named because the deliberations are private.

While another buyer can’t be ruled out, a bid from JBS would likely face antitrust scrutiny and require the Brazilian meat producer to sell assets, according to Heather Jones, a Richmond, Virginia-based analyst at BB&T. CP Foods is already highly leveraged and may have more trouble securing financing than Shuanghui, she said in a phone interview.

Debt Ratio

Officials at CP Foods and JBS declined to comment.

After buying a majority stake in its Hong Kong affiliate CP Pokphand Co. in 2011, CP Foods’s total debt is now $5.4 billion. That’s equal to 70 percent of its market capitalization, more than triple the median for global food manufacturers valued at more than $1 billion, data compiled by Bloomberg show.

With CP Foods likely needing to take on more debt or sell assets to fund a Smithfield takeover, a deal would “significantly weaken CP Foods’ financial status,” Nalyne Viriyasathien, an analyst at DBS Vickers Securities (Thailand) Co., said by phone. The “financial costs exceed the benefit.”

Still, while Shuanghui’s proposal is fair, it’s not a “knockout bid,” giving other suitors the opportunity to counter with a higher offer, according to Tim Ramey, a Lake Oswego, Oregon-based analyst at D.A. Davidson & Co.

The $34-a-share offer “leaves room on the table for financial sponsors or other food industry players to take a shot at it,” Ramey said in a phone interview. “Anybody could do a highly accretive deal for Smithfield.”

Rival Offer

Bryan Agbabian of Smithfield shareholder Allianz SE said the company could fetch more.

“I am happy with where the stock is, but I think there is a chance someone could come in with a higher price,” Agbabian, the San Francisco-based sector head of agricultural equities for Allianz, said in a phone interview.

Before the deal was revealed, Smithfield faced pressure from one of its biggest shareholders, Continental Grain Co., to boost value for owners by breaking up. Doing so would boost Smithfield’s value to $32.45 a share, according to the average of six analysts’ estimates compiled by Bloomberg in March.

Continental said on April 25 that Smithfield’s share price could reach $40 in three years if the company adopted its proposal. Representatives for Continental didn’t return a request for comment.

“I think the deal gets done in the end,” Michael Cook Sr., the CEO of Memphis, Tennessee-based SouthernSun Asset Management, Smithfield’s sixth-largest shareholder, said in a phone interview. While he would prefer $38 to $40 a share, $34 “seems reasonable,” he said.

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