Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Smithfield Buyout Is a Matter of National Security

Earlier this year, the world's largest pork producer, Smithfield Farms (UNKNOWN: SFD.DL2  ) , received an appealing buyout offer from a China-based meat processor-- Shuanghui The board agreed to the $7.1 billion takeover (debt included) -- the largest Chinese buyout of a U.S. firm in history. Now, though, it appears that U.S. regulators may block the deal as a matter of national security. If the deal fails, investors may have to worry, as the company is struggling to grow amid rising feed costs and tepid international demand. Here's why federal regulators are concerned.

Sell it
Smithfield's CEO, C. Larry Pope, has tried to convince the Senate Agricultural Committee that this sale is not only in the best interest of the company and its shareholders, but for the United States, as well.

Smithfield currently owns 460 pork farms and contracts with more than 2,000 others. Selling the business to a Chinese-owned entity would be a significant shift in the U.S. agribusiness landscape, and it has lawmakers concerned. Underscoring this is the fact that the Committee on Foreign Investment in the United States is closely reviewing the deal -- a rare procedure for a food company buyout.

Laundry list
Chinese ownership of the biggest pork supplier in the U.S. raises legitimate concerns. For one, there's a question of food safety. China's food safety rules are known to be quite lax, and if they owned the farms here in the U.S., the resulting food quality could easily suffer. Of course, there is also the issue of a secure food supply. Handing over these farms shifts quite a bit of bargaining power over to the Chinese, even if the hogs are on U.S. soil. Americans could see a shortage of pork in the supermarkets, and higher prices.

Other concerns include the proximity of some of the farms to U.S. military bases. Snooping is a hot-button issue right now (even if the focus is on the U.S.), and Chinese-owned farms that are a hop, skip, and a jump from our domestic installations could provide easy vantage points for prying eyes and ears.

What are the chances?
It's hard to say how strong of a stance U.S. regulators will ultimately take, though the initial questions suggested a decent amount of hesitance. The deal could pave the way for future foreign agribusiness acquisitions, and some are worried that we are selling away one of our most fundamental needs.

Besides the political implications, some shareholders believe the buyout offer undervalues Smithfield. Starboard Value, a 6% owner,  opposes the deal, suggesting a breakup of the company as a more viable alternative.

Specifically, Starboard believes the company is worth, potentially, 60% more than the current offer -- or about $10 billion, as a sum-of-the-parts valuation. This would imply a share price around $54, compared to today's $33 per share. Selling off pieces of the company potentially yields a greater take -- a buyer may be inclined to pony up for a portion of the business, while not interested in the entire company. Still, Starboard's valuation is ambitious, according to other analysts and fund managers. Continental Grain [], formerly one of the largest shareholders, had previously held a similar sum-of-the-parts valuation, but has since said Shanghui's $34 offer is fair. 

Investors need to keep a close eye on the developments here, but should not assume Smithfield's bid will approach Starboard's estimates. Both the board and management are behind the current offer, and there isn't much convincing evidence currently to back up a price north of $50.

Furthermore, considering the relatively weak environment in the pork markets. If the acquisition falls through, the Street will likely shift focus to the tepid financial performance.

More from The Motley Fool 

Profiting from our increasingly global economy can be as easy as investing in your own backyard. The Motley Fool's free report, "3 American Companies Set to Dominate the World," shows you how. Click here to get your free copy before it's gone.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2542622, ~/Articles/ArticleHandler.aspx, 5/25/2016 5:14:24 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,851.51 145.46 0.82%
S&P 500 2,090.54 14.48 0.70%
NASD 4,894.89 33.84 0.70%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
SFD.DL2 $0.00 Down +0.00 +0.00%
Smithfield Foods,… CAPS Rating: **