Should Smithfield Shareholders Reject the Buyout Offer?

Virginia-based pork producer Smithfield Foods (UNKNOWN: SFD.DL2  ) recently released a less-than-stellar earnings announcement, largely due to increasing feed prices coupled with heavy pricing pressure at the grocery store. But the earnings have been far from the headlines as the company looks to close out on its sale to China's largest meat processing company. To add to the fray, 6% activist owner Starboard Value believes that the buyout offer undervalues Smithfield, and that a breakup of the company offers shareholders a better alternative. Let's take a look at both options, and try to determine where the cards are stacked.

A porky company?
Starboard Value thinks Smithfield is a bloated company, better off as three organizations instead of one.

Specifically, Starboard is calling for the company to split into three categories: hog farm, international sales of fresh and packaged meat, and domestic pork production. Then, the fund says, each element will attract a wide array of suitors who can drive up the individual bids and contribute to a larger overall buyout of the company and its shareholders. Starboard believes the process could yield $44 to $55 per share -- a large premium to both its current price of $33 per share and China's Shuanghui International Holdings' acquisition price of $34 per share.

Does it work?
On the surface, Starboard's call makes sense. Separation allows for clearer scrutiny of each of Smithfield's divisions, and could possibly lead to more attractive valuations. On top of that, firms that had not been interested in acquiring the near $5 billion company may be more compelled to pick up one of the pieces for a substantially smaller amount of money.

The thing is, there are a few elements of Starboard's proposition that aren't necessarily incorrect, but questionable. For one, the breakup process would be very expensive and time-consuming. Investors in the company, who may be concerned with Smithfield's tepid performance and the headwinds facing the industry, may prefer to take the immediate offer from Shuanghui for $34 and get out. In general, timely and costly affairs do not rest well on the shoulders of anxious shareholders.

Furthermore, Starboard's valuation assumes hog prices will stay at their current level and not be disrupted by the acquisition of one of the largest hog farms in the United States.

JPMorgan conducted a valuation as well, putting the firm around $30 per share.

What will happen? 
Shareholders haven't rallied one way or the other since Starboard's call to action. The company's board seems set to sell to Shuanghui, with the only large obstacle remaining being federal regulators.

Unless Starboard provides a more coherent, tightly knit argument for why shareholders should vote down the buyout, and why Smithfield is truly worth north of $40 per share, then one should expect the first offer to remain the option of choice.

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