Starwood Value Tells Smithfield Foods to Ditch China Bid and Break Up For More Value

Noted activist investor Starwood Value wrote a letter to the board of Smithfield Foods SFD urging the company to ditch its previously agreed takeover from Chinese company Shuanghui International and to break the company up into three separate entities. Starboard sees the move generating about $10-$20 more in value for shareholders than the Shuanhui offer.

Break Up Instead of Sale

Based on Starboard's sum of the parts analysis, they value Smithfield Foods at between $44 and $54 per share. This is well in excess of the buyout offer from Shuanghui of $34 and offers more potential value for shareholders of the ailing pork producer. Last week, the company reported dismal earnings adding fuel to the fire for either the sale to go through or for a break up of the company.

Starboard Value wants Smithfield to separate its three main business lines apart. Smithfield currently operates in the U.S. pork production, pig farming, and packaged meats sectors. Starboard Value sees little correlation between these as the pig farming business actually weighs on the others.

As whole pig prices rise, the pig farming segment does better due to higher market prices. However, the higher prices decrease consumer demand for final products including packaged foods and other pork products, meaning that the businesses are actually counter-productive for shareholders.

Vertical Integration

Chinese conglomerate Shuanghui wants to keep the company whole and vertically integrate it into its current form. China is a large consumer of pork and the move would ensure that Shuanghui has a solid supply of the other white meat to meet demand.

The Starboard deal does raise uncertainty risk that the Shuaghui offer avoids. Splitting a company is much more difficult than selling one however selling to a foreign entity raises its own risks.

Market Uncertain

The uncertainty surrounding the execution of any deal increased this morning and shares reacted to reflect this increase in proposed shareholder value. However, shares quickly receded from day's highs and traded higher by 1.27 percent in late-afternoon trading heading into the close as investors digest the new uncertainty surrounding the deal.