Smithfield Foods Sale is a Real Game Changer

Smithfield Foods has agreed to a $4.7 billion takeover by China’s Shuanghui International. Smithfield is the world’s largest pork producer.  It had total sales of 12.1 billion in fiscal 2012.  Smithfield has approximately 1.1 million sows worldwide. The total purchase price when considering the assumption of existing debt, values Smithfield at approximately 7.1 billion.  Shuanghui International is the majority shareholder of Henan Shuanghui Investment and Development Co. (Shineway) which is China’s largest publicly traded meat products Company. The purchase price of $34.00 per share cash is a 31% premium over the closing stock price on May 28, the last trading day prior to the announced sale. “We are pleased to have reached this agreement with Smithfield, which represents an historic opportunity for both companies and stakeholders.” Said Shuanghui Chairman Wan Long (no relation to this Jim Long) “Shuanghui is a leading pork producer in China and a Pioneer in the Chinese meat processing industry with over 30 years of history.  Smithfield is a leader in our industry and together we will be able to meet the growing demand in China for pork by importing high-quality meat products from the United States, while continuing to serve markets in the United States and around the world.  The combination creates a company with an unmatched set of assets, products and geographic reach.”

Our observations on the Potential Purchase:

Chinese authorities have told us in the last few months that they expect the need to import 10-15% of their pork needs in the future as demand for pork for the 1.3 billion people will not be met by Chinese Domestic production.  That percentage is the equivalent pork of 60-90 million market hogs per year.  In one move by purchasing Smithfield, China has acquired production infrastructure and know how to control the pork of over 30 million hogs per year.  China will control supply and be beneficiary of not only Smithfield’s profits but profits from the importing of the meat.  This transaction has an economic, social and political context in China as Pork is a staple that there can be no shortage.  To build Smithfield from scratch 1.1 million sows, packing plants, logistics and know how is next to impossible in less than a decade.  One move all done.  For the North American Industry we see the transaction as a positive.  China will be importing pork with this investment, we doubt if there will be trade issues that will restrict access to China’s market.  Any pork that leaves America is price supporting, the deal we expect will add 5 cents a pound to North American Hog Markets for the next 5-10 years.

Summary

As the Smithfield potential sale demonstrates, this is a dynamic fast changing business.  The challenge of making money in the swine industry is being highlighted by Bloomberg News which in many of its articles on Smithfield highlights “one of the worst preforming large US food makers over the last five years”.  The point is owning hogs in North America has not been a recipe for wealth creation over the last five years.   Smithfield owns more than anyone.  Smithfield like all of us has been pounded by Swine Flu, high feed prices, labour, animal welfare, exchange rates etc.  There is no magic, if not for some producers supported by growing their own feed and the massive appreciation of farmland value our industry would be in a total freefall.

Categorised in: Pork Commentary

This post was written by Genesus