- The Washington Times - Monday, June 17, 2013

One of Smithfield Foods Inc.’s largest investors would like to chop up America’s biggest pork producer and sell it piece-by-piece, with representatives urging the board of directors to kill a planned $4.7 billion buyout by a Chinese company that they say “significantly understates” the company’s value.

In a letter Monday to Smithfield’s board, Starboard Value LP, a hedge fund that owns a 5.7 percent stake in the company, said the pork producer could get “well in excess” of the $34 per share that China’s largest meat producer, Shuanghui International Holdings Ltd., agreed to pay last month for the whole company. Of course, it may be an uphill battle convincing the board and other shareholders to pass up a record-setting deal already waiting for them in order to break up the company and start over.

Shuanghui’s offer would be the biggest purchase of an American company by a Chinese corporation.

Investors had little reaction to the letter. Smithfield’s shares remained flat Monday, closing at $33.08, up less than 1 percent. Smithfield has not yet publicly responded to the letter.

“We believe the proposed merger still significantly understates a conservative sum-of-the-parts valuation of the company, which we estimate to be worth between $9 billion and $10.8 billion after tax,” Starboard wrote in the letter.

This isn’t the first time a Smithfield investor suggested the company break up into separate divisions. Continental Grain Co. asked the company to consider a similar move but recently dropped its objections and sold its shares after the stock price went up when Shuanghui agreed to buy Smithfield.

Starboard estimates that the company could sell for from $44 per share to $55 per share, which would be a premium of as much as 62 percent more than the Shuanghui offer, the hedge fund said.

Starboard advocates selling the hog production, international and pork divisions separately, and suggested it already has buyers lined up, saying there are “numerous interested parties.” The hedge fund offered to recruit these buyers because Smithfield is already under contract to sell to Shuanghui and can no longer look for better offers on its own.

“In light of this limitation, Starboard is seeking to identify and connect any strategic or financial buyers for the company’s individual business units to determine if it would be possible to structure a sum-of-the-parts transaction that could deliver greater value for shareholders than the proposed merger,” Starboard wrote. “We hope that our efforts will lead to the submission of a superior proposal.”

Smithfield runs the largest pork processing operation in the world, which is responsible for a variety of brand-name pork products.

Starboard believes that Smithfield’s pork division alone could sell for more than the Chinese offer for the whole company, estimating the unit’s value between $6.2 billion and $7.9 billion.

Starboard also estimates that Smithfield’s hog production unit could sell for from $1.9 billion to $2.3 billion. It runs the largest hog farm operation in the world with more than 850,000 sows, which produce about 16 million hogs annually.

The international division, which has business interests in hog farming, meat processing and branded meat operations from around the world, could sell for from $1.3 billion to $1.5 billion, Starboard estimates.

Starboard suggested that Smithfield has a “duty to its investors” to consider this alternative to selling the company to Shuanghui. The hedge fund just recently purchased its stake in Smithfield in March because it believed at the time that the company was undervalued. It still believes the company can sell for more, and has fresh research to back it up.

“We initially invested in Smithfield because we believed that the company was significantly undervalued and that there were opportunities within the control of management and the board of directors to substantially improve the value for the benefit of shareholders,” Starboard wrote.

“Our analysis indicated that a separation of these businesses was entirely feasible and could be accomplished.”

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