A MAJOR strategic investor in Smithfield Foods Inc. delivered a letter to the company's board of directors June 17 advising the board that the agreement the company reached to be acquired by Shuanghui International Holdings Inc. undervalues Smithfield.
Smithfield agreed to be acquired by China-based Shuanghui for $34 per share, or $4.7 billion, and the assumption of $2.5 billion in Smithfield debt, bringing the total value of the deal to more than $7 billion (Feedstuffs, June 3).
Starboard Value LP, which bought a 5.7% interest in Smithfield in March, proposed that the value of the company would be far higher if it were to sell each of its three operating divisions independently, a separation that Starboard concluded in an analysis would be "entirely feasible."
Starboard said it has determined that there would be "several" likely buyers for each unit.
Starboard is an investment management firm that invests in undervalued companies, which it said it had determined Smithfield to be when it invested in the company earlier this year.
In its letter, Starboard said it estimates that "a conservative sum-of-the-parts valuation" of Smithfield would be $44-55 per share, or $9.0 billion to $10.8 billion, compared with Shuanghui's $34 per share.
Also in its letter, Starboard said it recognizes that the agreement with Shuanghui includes a clause prohibiting Smithfield from contacting other parties for a superior offer or for their interest in acquiring the company's divisions.
Accordingly, Starboard said it plans "to identify" buyers for the three divisions to determine if it would be possible to structure a sum-of-the-parts transaction that would deliver greater value than Shuanghui's offer.
The three divisions would be Smithfield's hog production business and pork processing business in the U.S. and its international hog production and pork processing business in Mexico and Europe.
Smithfield said it will take the letter under advisement but prefers the merger with Shuanghui, noting that it provides Smithfield shareholders with "significant, immediate and certain" cash value for their investment in the company.
Shuanghui is an equity investor that owns China's largest pork producer, and because of the connection to China, the deal has raised food safety concerns in Congress.
Its offer must be approved by Smithfield shareholders and regulatory authorities, including the Committee on Foreign Investment in the United States. However, the two companies expect the acquisition to be completed in the third quarter of this year.
A bipartisan group of 15 Senate Agriculture Committee members raised concerns over the Smithfield acquisition. They urged Treasury Secretary Jacob Lew to include both the U.S. Department of Agriculture and the Food & Drug Administration in the review of the proposed purchase so that the oversight process includes experts on the U.S. food supply and food safety.
The senators questioned whether reviews of such transactions adequately take national security interests into account, uphold food safety standards, examine overall trends in foreign ownership of the U.S. food supply and take appropriate measures to safeguard intellectual property.