Smithfield Investor Urges Hog Farmer to Consider Breakup

Smithfield Foods Inc., the hog producer that’s agreed to a $4.7 billion bid from Shuanghui International Holdings Ltd., was urged by activist investor Starboard Value LP to consider splitting itself up instead.

A breakup may value the world’s largest hog and pork producer at about $44 to $55 a share, the investor, which said it holds a 5.7 percent stake in the company, wrote in a letter to Smithfield’s board yesterday. Hong Kong-based Shuanghui agreed in May to pay $34 a share for the Smithfield, Virginia-based company.

“We question whether the board gave sufficient consideration to a sale of the divisions in separate transactions, or whether it focused primarily on an all-cash transaction for the company as a whole,” Starboard Chief Executive Officer Jeffrey C. Smith said in the letter.

Smithfield said in an e-mailed statement that it will review the letter and reiterated its recommendation that shareholders accept Shuanghui’s offer. The Chinese company’s offer is good for Smithfield shareholders, investors and employees, Robert Wan, spokesman for Shuanghui, said by phone today from Hong Kong.

The U.S. producer faced similar demands in March from shareholder Continental Grain Co. as rising animal-feed costs made hog production unprofitable. Continental said in April a breakup into three businesses would achieve a stock price of $40 within three years. It subsequently backed the bid from Shuanghui and said it will exit its holding after the deal.

Shares of Smithfield rose 0.9 percent to $33.08 in New York yesterday.

Increased Offer

Shuanghui Chairman Wan Long said May 31 the company may raise its offer to meet other bids if necessary. The transaction by China’s top pork producer is valued at about $7.1 billion including debt.

“Raising the offer for Smithfield would have to prolong the time for Shuanghui to recover costs,” James Feng, general manager at, China’s biggest independent hog researcher, said today. “A higher valuation of Smithfield may force Shuanghui to walk away.”

While Smithfield can’t actively seek better offers, it can respond to unsolicited bids that are superior to Shuanghui’s, a person familiar with the matter said May 29.

Shuanghui may be the only remaining buyer for Smithfield after Charoen Pokphand Foods Pcl of Thailand and JBS SA of Brazil both walked from the sale process, said Thomas Sandell. His investment firm, Sandell Asset Management Corp., acquired 150,000 Smithfield shares in the first quarter for about $26 apiece, he said.

Breakup Fee

The breakup fee climbs after the go-shop period expires, said Sandell, who hadn’t yet read Starboard’s proposal.

“That might make it a little more onerous for other parties to get in here,” he said yesterday on Bloomberg Television’s “Market Makers” with Erik Schatzker and Sara Eisen. There’s “a little bit of a concern that there might just be one buyer.”

Starboard, a New York-based investment adviser that has pushed for changes at retailer Office Depot Inc. and Internet company AOL Inc. in the past year, said it’s not necessarily opposing the Shuanghui takeover.

Estimated Value

“We believe the proposed merger goes a long way towards unlocking the intrinsic value of the company for shareholders,” Smith said in the letter. “We would be remiss, however, to let an opportunity slip by to determine whether the company could realize even greater value.”

Starboard estimates the pretax value of the hog unit to be between $1.9 billion and $2.3 billion; the international operations to be between $1.3 billion and $1.5 billion; and the pork division should be worth between $6.2 billion and $7.9 billion.

“It seems high on the hog-production side,” Ann Gurkin, a Richmond, Virginia-based analyst for Davenport & Co., said in a telephone interview yesterday.

In a March 8 report, Gurkin estimated the sum-of-the-parts value for the whole company at $8.9 billion including net debt, with the hog unit worth $702 million, the international operations $990 million and the pork division $7.2 billion.

Pork Consumption

The six analysts’ estimates for Smithfield’s post-breakup value -- compiled in March after Continental Grain first made its proposal -- ranged from $26 to $48 a share.

Smithfield has attracted interest from China as the country’s growing middle class boosts pork consumption. A takeover by Shuanghui would be the biggest Chinese purchase of a U.S. company and follows other global food and agriculture-related acquisitions. Smithfield and Shuanghui said May 29 they expected the deal to close this year.

Smithfield’s livestock unit produces about 15.8 million hogs a year, according to the company’s website. It owns 460 farms and has contracts with 2,100 others across 12 U.S. states.

Starboard’s call to consider a breakup was first reported by the Wall Street Journal.