Analysts at JPMorgan North America Equity Research assumed that the Committee on Foreign Investments of the United States (CFIUS) will find a compromise solution to approve the sale of Smithfield Foods, Inc. (NYSE:SFD) Shuanghui International Ltd, the biggest pork producer in China.
Smithfield Foods and Shuanghui International Transaction
JPMorgan analyst Ken Goldman says that if CFIUS can find a compromise solution for approval of the acquisition agreement between Sprint Nextel Corporation (NYSE:S) and Softbank Corp (TYO:9984) (OTCMKTS:SFTBF), the agency should be able to do the same with a transaction between Smithfield Foods, Inc. (NYSE:SFD) and Shuanghui International Ltd. According to Goldman, CFIUS could regulate the new company in terms of the volume of pork that needs to stay in the United States.
CFIUS is responsible for reviewing transactions that could result in control of a U.S. business by a foreign entity and determine the effect of such transactions to the national security of the country.
Goldman opined, “Pork is not directly an issue of national security,” compared with a defence or telecom business. He added, “If CFIUS can let Sprint get purchased by Japanese Softbank, as it apparently has, we have a hard time seeing a pork deal getting outright blocked.”
However, he also cited the possibility that the agency may have a heightened concern over Smithfield Foods, Inc. (NYSE:SFD)’s deal with the Chinese pork producer because China has a tarnished reputation in the protein industry due to recent cases of bird flu and thousands of dead hogs found in rivers. CFIUS may believe that the acquisition of the largest hog farmer and pork supplier by a Chinese firm could result to food supply risk. Generally, CFIUS approval process takes about 90 days, according to Goldman.
Smithfield Foods, Inc. (NYSE:SFD) is the second largest food company to be acquired by a foreign company. Goldman said when hedge funds asked him if it is safe to go back in the water and short food stocks in general, his answer is no.
Shuanghui Group agreed to purchase the U.S. hog farmer and pork supplier for $34 per share or for a total value of $7.2 billion including the assumption of $2.2 billion debt. The acquisition price represents a 31 percent premium of Smithfield Foods, Inc. (NYSE:SFD) closing price of $25.97 per share, yesterday.
Analysts at Bank of America Merrill Lynch (BAML) cited that the deal represents a 7.0x EBITDA multiple on a normalized basis and 8.6x on its F14 estimate, which is above Smithfield Foods, Inc. (NYSE:SFD)’s historical trading level of 5.0 to 7.0x. However, the research firm emphasized that the deal is lower than the $40 per share based on a break-up of the company, which was presented by Continental Grain Company to its board of directors on April 25.
BAML analysts said it has no rating for shares of Smithfield Foods, Inc. (NYSE:SFD), citing that the stock is no longer trading on fundamentals due to its announced transaction with Shuanghui International.