Smithfield Asked to Break Up
6/17 12:06 PM
(Dow Jones) -- A major Smithfield Foods Inc. investor is pressuring the company to explore a breakup rather than follow through with its planned takeover by a Chinese meat producer, according to a letter reviewed by The Wall Street Journal.
In a letter to the Smithfield board, expected to be delivered by Monday, activist investment fund Starboard Value LP says it has taken a 5.7% stake in the world's largest hog farmer and pork processor and urges the company to consider splitting up.
The position makes Starboard one of Smithfield's larger investors.
Virginia-based Smithfield agreed last month to a $4.7 billion offer from Shuanghui International Holdings Ltd. in a deal that would mark the biggest Chinese takeover of a U.S. company.
In the letter, Starboard argues that Smithfield would be worth more if it were broken up into three parts -- U.S. pork production, hog farming and international sales of fresh and packaged meats -- and then sold.
Starboard says a broken-up Smithfield could be worth $44 to $55 per share, compared with the $34-per-share price offered by Shuanghui. The offer, including debt, values Smithfield at $7.1 billion.
A Shuanghui spokesman declined to comment. Smithfield declined to comment.
Smithfield earlier this year opposed a push by another investor to break up the company.
Starboard, in its letter, says Smithfield never sought bidders for pieces of the company and that it believes suitors exist. Starboard says it is seeking to identify bidders for parts of Smithfield and wants the company to consider those offers should they arise.
In the 16-page letter from Starboard Chief Executive Jeffrey Smith, the firm lays out a detailed case for why each of the Smithfield parts are undervalued and how they could be run independently of one another.
In recent years, activist investors have pressured a number of large companies with disparate businesses to break themselves up using the "conglomerate discount" argument that a company is worth more as individual pieces than as a single firm.
Another big shareholder in Smithfield, Continental Grain Co., called for a breakup of Smithfield in March. Continental mostly exited its investment in Smithfield, it said, following the announcement late last month of Smithfield's deal with Shuanghui. At the time, Continental said it was pleased that Smithfield was "being proactive in realizing value for the benefit of shareholders."
Starboard sees more value in a breakup than did Continental, which had said selling off two units and taking other steps including implementation of a dividend could result in a Smithfield stock price of $40 within three years.
Smithfield is the latest high-profile battle for Starboard since the fund was spun off from the Cowen Group in 2011. Starboard challenged AOL Inc. with a proxy but lost its attempt to elect directors when shareholders opted to stick with management's team.
The investment fund has notched a number of wins. Earlier this month, Office Depot Inc. agreed to sell its 50% stake in Office Depot de Mexico SA to its joint-venture partner, a move that Starboard had been pushing Office Depot to make. Starboard also is pushing to get seats on the company's board.
Starboard has won board seats, either through agreements with companies or through a shareholder vote, at firms including paper-products company Wausau Paper Corp.
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