China-based Shuanghui International Holdings Limited agreed to acquire all of Smithfield Foods, Inc. (NYSE:SFD)’s outstanding shares for $34.00 per share in cash. This equates to a 31% premium to the closing price on May 28, 2013. Most sell-side analysts believe that the bid will go through. However, some outside of an industry some see potential issues. And as we note, many analysts believe this will lead to rises in pork prices.
The deal must gain regulatory approval under applicable U.S. and specified foreign antitrust and anti-competition laws, The Committee on Foreign Investment in the United States and other customary closing conditions.
“We do not anticipate any changes in how we do business operationally in the United States adn throughout the world,” Smithfield Chief Executive C. Larry Pope said in the announcement.
JPMorgan thinks the acquisition is likely to be approved, and could close as early as six weeks from now. Management expects the deal to wrap up in the back half of CY13.
JPMorgan Chase & Co. further comments on Shuanghui deal
An opportunity remains for others to jump in, but both JBS and CP seem to have taken themselves out of the competition. It appears Brazilian-owned JBS and Thai-owned Charoen Pokphand Foods Public Co. Ltd. (OTCMKTS:CPOKY) could still make competing bids, per media reports yesterday. However, The Wall Street Journal reported last night JBS was unlikely to make a counteroffer. As for CP, it seems to have taken itself out of the game, congratulating both Shuanghui and Smithfield and saying, “The Company studied the opportunity offered by SFD as same as other opportunities. However, the opportunity in this case came with a very limited timeframe.” Note that CP potentially could have a balance sheet issue. Per JPMorgan Chase & Co. (NYSE:JPM) analyst Kae Pornpunnarath, the company’s balance sheet is “quite stretched” at the moment and company’s top shareholder just did two large, debt-financed deals in the US.
Termination fee info. If Smithfield Foods, Inc. (NYSE:SFD) enters into an agreement with a “preexisting bidder” (probably JBS and CP) over the next 30 days, it owes Shuanghui $75MM. In other breakup circumstances, it owes Shuanghui $175MM. If Shuanghui breaks the deal or if most US government entities fail to approve the deal, Shuanghui owes Smithfield $275MM. Interestingly, though, Shuanghui owes nothing if the Committee on Foreign Investment in the United States (CFIUS) fails to approve the deal. To us, this indicates the Chinese company was at least partially concerned CFIUS will have its hesitations (and also suggests Smithfield Foods, Inc. (NYSE:SFD) was confident CFIUS will approve). Either party may terminate if the merger is not consummated by 11/29/13.
BAML on Shuanghui
Zhijun Of Shuanghui Said, “Chinese Consumers Like American pork”
Expect higher pork prices in the US. We expect SFD to export more pork to China, which would leave less pork for domestic consumption and probably lead to higher US pork prices as a result. As Yang Zhijun, Managing Director of Shuanghui said yesterday, “Chinese consumers like American pork. US farmers want foreign markets for their pork.” Over the long run, hog farmers may increase production to supply both domestic and international demands, but the near-term impact may be to limit US supply.
Thoughts on JBS for Smithfield Foods, Inc. (NYSE:SFD), as reported by Bloomberg In an article titled “CP Foods, JBS Said to have Weighed Offers for Smithfield”, Bloomberg reported from unnamed sources that JBS and Charoen Pokphand Foods Public Co. Ltd. (OTCMKTS:CPOKY) were preparing bids for Smithfield Foods, Inc. (NYSE:SFD) (see “SFD acquired for $34/share; Moving to No Rating”). The article mentions that SFD has 30 days to continue the talks with CP Foods and JBS, if higher unsolicited bids are made for Smithfield Foods, Inc. (NYSE:SFD). Though the company didn’t comment on this yet, we don’t believe that JBS will counterbid for SFD, and explain our reasons below. We also believe that the engagement of the Chinese looking to secure protein supply for the LT is positive for the entire protein sector in Brazil, as the US and Brazil dominate the global protein trade. Balance sheet, valuation and strategic fit limit JBS appetite In our opinion, JBS needs to evaluate a potential acquisition of SFD, given their size and relevance as the largest protein company in the world. However, we believe that several constraints would limit their appetite to counterbid for SFD:
1) Leverage: a US$7bn plus acquisition would stretch JBS balance sheet to above 4.8x ND/LTM EBITDA from 3.6x today, likely requiring equity as part of the financing too
2) Valuation: the target fwd multiple for SFD at 8.6x EBITDA compares to JBS at 6.4x, which would make the equity issuance dilutive
3) Rationale: JBS CEO Wesley Batista commented several times recently that JBS is focusing on small bolt on acquisitions instead of large deals
4) Strategic Fit: in our view, it would make more sense for JBS to have further downstream (brands & distribution) exposure, while SFD would add a significant amount of upstream exposure (Hogs and pork processing)
5) Antitrust issues could arise, as SFD has 26% market share in pork processing, while JBS USA has 11% share.
Credit Suisse Group AG on the deal
An article from Bloomberg news wire indicated that Charoen Pokphand Foods Public Co. Ltd. (OTCMKTS:CPOKY) and JBS were preparing bids for SFD prior to the Shuanghui announcement. However, given the antitrust issues that a deal involving JBS would create and the complications related to breaking up the company, we think Smithfield management would be cautious about accepting an offer. It was noted that within the terms of the agreement with Shuanghui, SFD has a 30-day “go shop” period in which it cannot actively seek but can respond to unsolicited bids that are higher than Shuanghui’s.
Approval from The Committee on Foreign Investment in the United States is next. We expect the committee to review whether Chinese ownership of Smithfield Foods, Inc. (NYSE:SFD) would negatively impact food quality and safety for U.S. consumers and food supplies since the deal puts so much emphasis on exporting Smithfield’s pork to China. SFD represents
roughly 3-4% of total U.S. protein production.
Politics are always an unknown factor, but we do not think this represents a major hurdle. The agreement with Shuanghui ensures that management and employees retain their jobs and that the company continues to adhere to domestic quality standards. Also, nothing would make U.S. farmers happier than to see Chinese demand for U.S. pork go up.
How will ContiGroup respond? In Contigroup’s April 25th presentation titled “It’s Time to Focus on Shareholder Return” the illustrative share price highlighted was $42-$55. However, getting to this value would have taken a lot of time and tremendous effort to transition SFD from a commodity processor to a high performing branded company. Additionally, even if Conti wanted to gather support to block this deal, it would be hard for them to get support from fellow investors. Conti only owns 8% of the stock.