Henan, China-based pork products manufacturer ZHONGPIN INC. (NASDAQ:HOGS) recently announced that it would take itself private by merging with Cayman Islands-based Golden Bridge Holdings Limited. In a complex international transaction, Golden Bridge will purchase the company using a specially-formed Delaware-based subsidiary known as Golden Bridge Merger Sub Limited. Zhongpin's current chief executive officer and several other key company associates will also contribute capital to the deal in exchange for partial ownership stakes in the new entity. The deal is valued at $505 million and will be partially financed with a $320 million loan from the China Development Bank.
As a condition of the merger, current shareholders of Zhongpin's common stock will receive $13.50 in cash per share. This represents a premium of 8 percent to the stock's current value of $12.50. Investors who purchased shares of Zhongpin immediately before the November 26 merger announcement would have earned a premium of nearly 23 percent to the stock's November 23 closing price of $10.86. In addition to Golden Bridge Holdings Limited, six former Zhongpin executives will retain ownership stakes in the new company.
Zhongpin is a major manufacturer and distributor of pork products in mainland China. The company directly employs about 8,000 full-time workers in the country and employs thousands more part-time workers at nearly 3,500 retail stores across China. It specializes in frozen and chilled pork, pork by-products and body parts, processed pork-derived meat products, and specialty products like pork rinds. It also distributes fresh and frozen fruits, vegetables and processed vegetable products.
On the Nasdaq, HOGS has almost always traded at a significant discount to US based competitors like Tyson Foods, Inc. (NYSE:TSN) and Smithfield Foods, Inc. (NYSE:SFD) . Tyson and Smithfield both have forward PE ratios of around 9. Due to the takeover talks, Zhongpin has a similar PE, but before these talks the PE was usually around 8 and had gone as low as 3.9 in 2011. In terms of price to book value, Zhongpin is also trailing. Tyson has a P/B of 1.27 and Smithfield of 1.09 whereas Zhongpin had been as low as 0.65 in the past year. These valuations occurred while Zhongpin had a consistently higher ROA until lately. Much of the reason for the lower valuation is the discount that all Chinese companies are receiving due to the big Chinese frauds in the last few years.
Although the bulk of Zhongpin's Chinese sales occur in the retail sector, it also maintains a number of wholesale customers. These include wholesale distributors as well as institutional kitchens in hospitals, factories, army bases, government facilities and schools. It serves a limited number of international markets in Southeast Asia and Europe on a wholesale basis.