Chinese firm to buy Smithfield Foods for $7.1B

From the Richmond Times-Dispatch:

The company that made Smithfield “the ham capital of the world” will become a subsidiary of a China-based food giant in a planned $7.1 billion deal, the largest-ever acquisition of a U.S company by a Chinese firm.

Smithfield Foods Inc., which grew from a small packing operation started in 1936 by the Luter family to become the world’s largest pork producer, announced Wednesday it has agreed to be acquired by Shuanghui International Holdings Ltd., China’s biggest meat producer, for $4.72 billion.

Including the assumption of Smithfield Foods’ debt, the deal is valued at $7.1 billion.

Smithfield Foods’ top executive repeatedly said Wednesday that the company will remain a Virginia-based firm and won’t close any plants or fire employees.

“There will be no impact on how we do business operationally in America and around the world as a result of this transaction,” Smithfield Foods President and CEO C. Larry Pope said in a conference call with analysts and reporters. “Shuanghui is committed to maintaining Smithfield’s operations, its staff and its management. There will be no closures of Smithfield facilities and locations.”

If the deal is completed as expected in the second half of this year, Smithfield Foods would operate as an independent subsidiary of Shuanghui International and would maintain its headquarters in Smithfield, a town of about 8,100 people that heavily relies on the company’s jobs, tax revenue and philanthropy.

Smithfield Foods — whose brands include Armour, Farmland and its namesake — is the ninth-largest of the 23 Fortune 500 companies based in Virginia. With revenue of $13.1 billion and profit of $361 million in its most recent fiscal year, the company ranks No. 213 among the nation’s 500 largest publicly traded companies by revenue.

Under the deal announced Wednesday, however, Smithfield Foods would no longer be publicly traded.

Pope presented the acquisition as a business opportunity for the company that will benefit its suppliers, including U.S. hog farmers from the Southeast to the Midwest.

Smithfield Foods already has a business relationship with Shuanghui and sells pork in China, but Pope said the acquisition will give the company deeper access to Shuanghui’s distribution networks in China, where consumers increasingly desire American-made foods.

“China is a large and growing market and is already the world’s single largest protein-consuming country,” Pope said. “In addition, Asia as a whole is a tremendous and growing export opportunity for Smithfield.”

He said the company “has grown about as big as we can grow” in the U.S. market and needs to look to overseas markets for future growth.

Shareholders of Smithfield Foods will receive $34 per share under terms of the deal, a 31 percent premium on the company’s closing stock price of $25.97 on Tuesday. Shares surged 28.4 percent, or $7.28, to close Wednesday at $33.35 on the New York Stock Exchange.

The deal comes as Smithfield’s second-largest shareholder, Continental Grain Co., has been pressuring the company to consider splitting itself up, arguing its stock has underperformed compared with some of its competitors.

Pope said Wednesday that the company’s leadership has been “frustrated” with its stock valuation for some time and that the board has been considering options to return more value to shareholders. The company had considered a merger with Shuanghui as early as 2009, he said.

He said the acquisition is a better deal for shareholders than dividing the company.

“This is a transaction that maintains the company and its organizational structure,” said Pope, a 30-year veteran of the company who succeeded Joseph E. Luter III as CEO in 2006.

“We are certainly very pleased that they (Smithfield) are taking steps to return value to their shareholders,” said Ann Gurkin, an analyst for Davenport & Co. in Richmond who follows the company.

However, Gurkin noted that there may be opportunities to unlock more value, and that other bids for Smithfield could emerge.

Bloomberg News, citing unnamed sources, reported Wednesday that two other companies, Charoen Pokphand Foods Pclof Thailand and JBS S.A. of Brazil, were preparing bids for Smithfield Foods before the company agreed to the Shuanghui takeover.

Under the terms of its agreement with Shuanghui, Smithfield Foods has 30 days to continue talks with CP Foods and JBS, Bloomberg reported, citing a person familiar with the matter who asked not to be named because the deliberations are private.

It wasn’t immediately clear whether JBS or CP Foods would consider counterbids for Smithfield Foods. Pope confirmed that the company agreed to a limited “go-shop” period as part of its deal with Shuanghui. He declined to elaborate or comment on other bidders.

The boards of directors of Smithfield Foods and Shuanghui have unanimously approved the transaction, which still needs approval from Smithfield’s Foods’ shareholders.

The deal also may be subject to review by the U.S. Committee on Foreign Investment, which reviews foreign acquisitions of U.S. companies for national security concerns.

Pope said he foresees no problems with the company receiving government approval. He said the deal would be good for U.S. farmers by helping to open more of the Chinese market to their products.

“This is not a strategy to import Chinese pork into the United States,” he said. “This is a strategy to export pork out of the United States.”

In the town of Smithfield, the announcement came as a surprise, Town Manager Peter M. Stephenson said.

“I was concerned at first,” Stephenson said, adding that he had a conversation Wednesday with a Smithfield Foods executive that “put me at ease.”

“I was pretty much assured that other than an ownership change, there are no other changes,” he said. “(Smithfield Foods) is definitely our bread and butter, and our No. 1 industry.”

Smithfield Foods employs about 3,800 people in Virginia. It also is a major buyer of hogs raised on Virginia farms, purchasing hogs from both contract and independent growers, said John H. Parker, executive director of the Virginia Pork Industry Board.

Parker estimated that the state has about 400 hog farmers producing a total of about 1.1 million hogs per year. Virginia is the nation’s 14th-largest hog producer, he said.

“China is the grand prize for pork exports,” said Todd P. Haymore, Virginia’s secretary of agriculture and forestry. “The market is growing and the demand is there. It is a combination of a growing population base and a population that is more affluent and has more disposable income.”