NEW YORK – Starboard Value L.P., a shareholder of Smithfield Foods, Inc., issued a letter June 17 stating that the offer by Shuanghui International Holdings of $34 per share undervalues the company. In the letter, from Jeffrey C. Smith, managing member of Starboard Value, said a more fair value for Smithfield Foods would be in the range of $43.85 to $55.21 per share if the company was broken up.
“We believe the proposed merger goes a long way towards closing the gap between the pre-deal market value of Smithfield and the intrinsic value of the business,” Mr. Smith wrote in the letter. “However, 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, or approximately $44 to $55 per share, representing an approximate 29% to 62% premium to the $34 per share Shuanghui deal.”
Mr. Smith said Starboard owns 5.7% of Smithfield Foods, Inc. and has been a shareholder of the company since March 2013. According to Starboard, its fund invests in “deeply undervalued” small cap companies and actively engages with management to help shareholders gain value. Smithfield has a market capitalization of about $4.3 billion.
“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 value for the benefit of shareholders,” Mr. Smith said. “Specifically, our research indicated that the sum-of-the-parts value of the company's operating divisions, which include Hog Production, International, and Pork, was well in excess of the then-current trading price of Smithfield.
“Our analysis indicated that a separation of these businesses was entirely feasible and could be accomplished without significant tax leakage. Also, we believed that there were several likely strategic acquirers for each of these divisions.
“On a standalone basis, we had also identified opportunities for increased operational efficiencies that, particularly in the Pork division, could dramatically improve operating margins and profitability. Based on these factors, we felt Smithfield was an attractive investment with significant potential upside based on improved execution and a separation of the operating divisions.”
Mr. Smith’s assertion that Smithfield Foods is worth more broken up echoes calls by another Smithfield Foods shareholder, Continental Grain Co., that the company should be separated into three independent companies to boost shareholder value. Since the acquisition announcement by Shuanghui, Continental Grain has come out in favor of the deal.
“We fully understand that under the merger agreement, Smithfield is contractually prohibited from seeking superior offers for the company or from contacting third parties who may be interested in acquiring certain of the company's operating divisions,” Mr. Smith said. “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. We hope that our efforts will lead to the submission of a superior proposal under the terms of the merger agreement.”
On June 14, Smithfield issued its fiscal 2013 earnings. Net income in the year ended April 28 was $183.8 million, equal to $1.26 per share on the common stock, which compared with $361.3 million, or $2.23 per share, in fiscal 2012. Net sales increased narrowly to $13,221.1 million from $13,094.3 million.
For the fourth quarter ended April 28, the company had income of $29.7 million, or 21c per share, which compared with income of $79.5 million, or 50c per share, during the same quarter of the previous year. Sales for the quarter were $3,320.7 million, up from $3,209.2 million.
A challenging year in the company’s Hog Production unit and a weak export market were identified as reasons for the decline in the full year earnings.