- The Washington Times - Monday, July 3, 2006

European sales may become the key to growth for the nation’s largest hog producer.

Smithfield Foods Inc. of Smithfield, Va., last week announced plans to purchase the European meats unit of Sara Lee Corp. for $575 million in cash.

The acquisition would double international sales for Smithfield, the world’s biggest pork processor. Within seven years, the European market could generate half of its revenue, the company said.

Smithfield stock rose 2 percent from $27.71 Monday to $28.15 Tuesday after the Sara Lee announcement. Shares yesterday remained unchanged from Friday, closing both days at $28.83.

“This is a solid acquisition for Smithfield as the company would become a larger presence in Europe,” said Leonard Teitelbaum, an analyst for Merrill Lynch, which conducts business with Smithfield.

With the purchase of the Sara Lee unit, the company — operating in Poland, Romania, Britain and France — becomes a major player in Portugal as well as the Belgium, Luxembourg and Netherlands region, Mr. Teitelbaum said.

The acquisition also gives Smithfield the third largest market share in France, where the company has little exposure, Wachovia Securities analysts Jonathan P. Feeney and John Baumgartner wrote in a note to clients.

“The immediate broad market presence augurs well for a long-term plan which funnels low-cost inputs from Eastern European production outposts to key western markets,” said the analysts, whose company has a business relationship with Smithfield.

In the short-term, however, analysts are concerned about a competitive protein market, in which supply of pork and beef is not a problem.

“Smithfield has a very strong competitive position in a highly cyclical industry,” wrote Mr. Feeney and Mr. Baumgartner. “[But] while pork export demand remains strong, near-term fundamentals remain uncertain as the industry deals with oversupply.”

Should the Japanese or Korean beef export markets reopen, analysts warn, pork demand would fall and profitability would take a hit.

Citing high energy prices and a depressed hog cycle, Smithfield last month said earnings for the fourth quarter ended April 30 plunged 99 percent to $1.1 million, or a penny a share, from $85.4 million, or 76 cents a share, a year ago.

Analysts call the weak domestic pork market temporary but expect it to continue through the summer.

In the long run, Mr. Feeney and Mr. Baumgartner say, Smithfield’s “higher-margin, value-added meats and dominant market share” will enable it to trump competitors.

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