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Advisory Firm Favors Smithfield Merger

Zacks Equity Research

U.S. meat producer Smithfield Foods, Inc. (SFD) has recently announced that an independent advisory firm Glass Lewis & Co. urged Smithfield shareholders to vote in favor of the company’s proposed merger deal with Hongkong-based Shuanghui International Holdings Limited. Smithfield's shareholders are scheduled to vote on the transaction at a special shareholders meeting to be held on Sep 24, 2013. Another independent proxy advisory firm Institutional Shareholder Services (ISS) is also in favor of the proposed deal.

Per the deal signed on May 30, Shuanghui will acquire all of the outstanding shares of Smithfield for $34.00 per share, totaling $7.1 billion, including Smithfield’s debt. The deal will open the doors for Smithfield to expand its footprint in China taking advantage of Shuanghui's solid distribution network. As far as Shuanghui is concerned, it will be able to meet the growing demand for pork in its domestic market by gaining control of Smithfield’s brands such as Smithfield, Armour and Farmland.

The deal enjoys the support of local, state and national elected officials, industry labor unions, U.S. hog farmers, leading economic and international affairs academics and even U.S. based food industry peers.

Most recently on Sep 6, the Committee on Foreign Investment in the United States (:CFIUS) also approved the proposed merger deal after a 45-day review period. Smithfield and Shuanghui also announced that the parties have received governmental merger clearance in Ukraine.

The deal is expected to close by Sep 26 following shareholder approval. However, one of the largest shareholders of Smithfield, Starboard Value LP, with beneficial ownership of approximately 5.7%, is planning to vote against the deal as it is seeking other offers that would provide greater value to Smithfield’s shareholders.

Recently, Starboard sent a letter to Smithfield’s board stating that it has received written interest from other parties to buy Smithfield's assets at a higher value. Starboard had also sent a letter to Smithfield's board of directors in June stating that it will be in the best interest of the shareholders if Smithfield sells off its various divisions like pork, hog production and international business individually rather than divesting the whole business all at once. Starboard also stated that the estimated value of the company is $9 billion – $10.8 billion or $44 – $55 per share, which is much higher than the deal price of $34 per share.

Smithfield holds a Zacks Rank #3 (Hold). Meat producers that are better placed and are worth considering include Pilgrim’s Pride Corp (PPC) and Tyson Food Inc (TSN) which hold a Zacks Rank #2 (Buy). Another food company Dole Food Co Inc (DOLE) with a Zacks Rank #2 is also worth considering.

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