Fitch weighs in on Smithfield buyout
June 3, 2013
by Meat&Poultry Staff
CHICAGO and NEW YORK – A recent proposed buyout of Smithfield Foods Inc., by one of China's largest meat processors highlights the value of US protein assets, according to Fitch Ratings.
Hong Kong-based Shuanghui International Holdings Ltd., a majority shareholder of China’s largest meat-processing enterprise, entered an agreement to acquire Smithfield Foods for approximately $7.1 billion, including assumption of debt. The ratings agency said this represents a 31 percent premium over the company's stock price as of May 28.
"The buyout multiple is roughly nine times Smithfield's LTM EBITDA of $787 million," Fitch said. "We view the multiple as reasonable based on historical prices paid for commodity-oriented firms and believe it reflects both an export and packaged meats premium.
Fitch said Smithfield and Shuanghui will likely complete the deal despite concerns around foreign-ownership of US food assets and potential negative implications for US consumers. Smithfield is the largest pork processor in the US. Tighter supplies of pork due to increased pork exports to China could raise pork prices domestically, the ratings agency said.
Shuanghui appears to be financially stable, Fitch said, and Morgan Stanley is expected to contribute $3 billion in financing with the remaining $1.7 billion to be funded by Shuanghui's equity sponsors.
"We believe the buyout is positive for both parties," Fitch said. "Shuanghui has access to a high-quality source of fresh pork during a time when Chinese consumers have heightened concerns about food safety. Moreover, the transaction allows Smithfield to keep its vertically integrated operations intact, provides an enhanced platform for future growth and delivers a hefty immediate return to shareholders."