Starboard Value Urges Breakup Deal Over Smithfield Buyout

Michael Teague  |

Activist investment fund Starboard Value LP announced on Monday morning that it has taken a 5.7 percent stake in the world’s largest pork producer Smithfield Foods (SFD) in an attempt to force the company to break itself up rather than proceed with the buyout deal the company’s board just recently agreed to with the majority-owner of China’s largest meat processor, Shuanghui International Holdings Ltd.

Starboard Value’s break-up plan for Smithfield would see the company split up its business into separate hog production, pork, and international units. In a letter to Smithfield’s board dated Monday, the fund claims that a breakup could see the three different units valued between $44 and $55 per share, compared to the $34 per share currently on offer from Shuanghui.

The plan echoes an April proposal from another Smithfield shareholder, Continental Grain Co., who at the time claimed that a divvying up of the company could see the different units with stocks of $40 per share within three years. Continental has since retracted its proposal in favor of the Shuanghui deal.

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While Smithfield is not currently allowed to actively pursue better offers, the company is allowed to accept unsolicited bids. China’s interest in Smithfield stems from the country’s rapidly growing middle class that is spurring an increase in demand for pork.

It has also been suggested that the deal holds value for China’s food processing industry following a spate of recent high-profile incidents highlighting food safety problems in the world’s most populated country. Smithfield owns 460 farms and is associated with 2,100 others in 12 states throughout the U.S., and the company’s chain of custody procedures and oversight mechanisms could represent valuable food-safety know-how for Shuanghui.

The Hong-Kong-based Shuanghui, if successful, will have conducted the largest ever Chinese acquisition of an American company. The two expect their deal to be completed in the current year.

Starboard Value, for its part, did not seem opposed to the buyout itself, as much as it was concerned with the breakup of the company. In its letter to Smithfield shareholders on Monday, it said “We believe the proposed merger goes a long way towards unlocking the intrinsic value of the company for shareholders,”. The letter went on to say that the fund would be “remiss, however, to let an opportunity slip by to determine whether the company could realize even greater value.”

Shares for Smithfield nudged up almost one percent in midday trading to $33.19, not far off its 52-week high of $33.96.

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