Investor Presses Smithfield to Carve Itself Up

Major Smithfield Foods (NYSE:SFD) investor Starboard Fund pushed the meat producer on Monday to explore a breakup in favor of the $4.7 billion buyout offer reached with China’s Shuanghui International Holdings.

The push by Starboard, which owns 5.7% of Smithfield’s outstanding stock, is based on the belief that a sum-of-the-parts valuation of the world’s largest meat producer would exceed the $34-a-share bid price from Shuanghui by as much as 62%.

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“We question whether the board gave sufficient consideration to a sale of the divisions in separate transactions, or whether it focused primarily on an all-cash transaction for the company as a whole, which we believe would entail a much more limited universe of potential buyers,” Starboard managing member Jeffrey Smith wrote in a lengthy letter to Smithfield’s board of directors.

Given the fact that Smithfield is prohibited from soliciting superior proposals or from contacting third parties about a partial sale, Starboard said it is “seeking to identify and connect any strategic or financial buyers” for the company’s individual business units.

Starboard said it acquired its stake in Smithfield in March 2013 specifically because it believed the company was “significantly undervalued” and there were “opportunities” to boost shareholder value, including a breakup.

By separating Smithfield’s operating divisions, which include hog production, international and pork, Starboard believes the company would be valued “well in excess” of the $34 bid from Shuanghui. The investor said a “conservative sum-of-the-parts valuation” of Smithfield should be worth between $9 billion and $10.8 billion after tax, or about $44 to $55 a share -- a 29% to 62% premium to the Shuanghui deal.

“It is incumbent upon Starboard to fully explore whether strategic or financial buyers are interested in the company's operating divisions in order to confirm our belief that the sum of Smithfield's parts are indeed greater than its whole,” Smith wrote.

Shares of the Smithfield, Va.-based company rose 1.43% to $33.27 in premarket trading on Monday, remaining below the Shuanghui bid price.

Last week Smithfield revealed a 63% plunge in fiscal fourth-quarter profits as the company grappled with rising costs and shrinking margins.

The buyout was unveiled on May 29 and is subject to approval from the Committee on Foreign Investment in the United States, or CFIUS, which is not expected to object to the deal.