In a letter to the Smithfield board, Jeffrey Smith, CEO of Starboard Value LP, argued that breaking up the company could be more profitable than the buyout proposal from Shuanghui International Holdings, Ltd. Starboard Value, a New York-based investment adviser, owns a 5.7 percent stake in Smithfield making it one of the processor's larger investors.
"We question whether the Board conducted a full strategic process to determine whether a piece-by-piece sale of the company's valuable, yet disparate, operating divisions could have provided greater value to shareholders than the Proposed Merger," Smith wrote.
In May, Hong Kong-based Shuanghui International, a majority shareholder of China’s largest meat-processing enterprise, proposed acquiring Smithfield, Va.-based Smithfield Foods for approximately $7.1 billion, including assumption of debt. Shuanghui will acquire all of Smithfield’s outstanding shares for $34 per share in cash, which is a 31 percent premium to Smithfield’s closing stock price of $25.97 on May 28. Smithfield’s common stock will no longer be publicly traded, and the company will become a wholly owned independent subsidiary of Shuanghui. The deal is expected to close in the second half of 2013.
But Smith said that the company would be worth more if it were divided and sold as three parts — pork production, hog farming and sales of fresh and packaged meats. Starboard estimated the "sum-of-the-parts" value of Smithfield between $9 billion and $10.8 billion after tax, or approximately $44 to $55 per share.
Continental Grain Co., which recently ended its ownership in Smithfield, had previously urged Smithfield to split the company in order to be more competitive. But Smithfield resisted, arguing that splitting the company would create supply issues and reduce vertical control over its value chain, among other arguments.
However, Smith said the letter was not in opposition to the proposed buyout, and the company was not taking any position or making any recommendation on the deal. However, a piece-by-piece sale of Smithfield could realize greater shareholder value, Starboard stated in the letter.
"As one of Smithfield's largest beneficial owners, our interests are aligned with those of all shareholders. While the current transaction represents a premium to the historical Smithfield trading range based on management's current standalone plan, we believe superior value may be achieved through a transaction based on the considerable value of each of the company's divisions.
"We look forward to determining whether there are potential interested parties who could facilitate a sum-of-the-parts transaction structure that could deliver even greater value for shareholders than the Proposed Merger at this time."