One of Smithfield Foods' (SFD) largest investors is pressuring shareholders to vote against the company's agreement to be purchased for $34 a share. Starboard Value LP claims the deal undervalues SFD assets by 29% to 62%, and that Smithfield's board of directors didn't do enough to explore a possible spin-off of company assets.
"We question whether the board gave sufficient consideration to a sale of the divisions in separate transations or whether it focused primarily on an all-cash transaction for the Company as a whole, which we believe would entail a much more limited limited universe of a potential buyers," Starboard wrote in lengthy press release Monday morning.
The key to Starboard's case is the idea that there are separate buyers for Smithfield's Hog Production, International and Pork units. Yahoo Senior Columnist Mike Santoli refers to Starboard's valuation process as "spreadsheet activism" laden with too many assumptions to be taken very seriously.
The most obvious explanation for Starboard's motivations is that rabble-rousing for a better deal gives them something akin to upside call on their SFD shares. "If you already own a piece why not try to shake them down for a little bit more?" Santoli suggests in the attached video. The other is Smithfield's board would be able to get the Chinese to offer a little more if only to make Starboard go away.
"Maybe you do have a little bit of upside even if this relatively complicated break-up plan isn't really the way it goes," Santoli concludes.
At $34 a share Smithfield shareholders got a 25% premium for the shares when the deal was announced, and fundamentals at Smithfield are eroding with feed price inflation hitting its feed costs and there's little to no pricing power with customers. Last week Smithfield announced profits were down 63% despite a 3% revenue gain.
The $34 bid from China's Shuanghui International isn't etched in stone. DC regulators are questioning the deal already. In addition there are existing trade restrictions between China and the US on pork products. Shuanghui would presumably be able to get around these limits more easily than any US buyers. That means Smithfield is simply worth more to Shuanghui than it would be to other bidders.
Individuals hoping to play along with Starboard should know going in that Shuanghui pulling its bid or regulators preventing the deal would likely send Smithfield shares back to the low $20's. The most prudent play is to sit on the sidelines and enjoy the spectacle as our pork-laden political bodies bicker over foreign entry into our pig industry.