Smithfield Foods, Inc. (SFD), Hormel Foods Corporation (HRL): Will This Huge Chinese/US Deal Go Through?

Page 1 of 2

As American consumers fret over the implications of the deal, retail investors and seasoned traders alike are lining up to play the planned merger between China’s state-run Shanghui International Holdings and pork producer Smithfield Foods, Inc. (NYSE:SFD). Although the terms of the deal appear to be quite favorable to Smithfield Foods, Inc. (NYSE:SFD), it presents a number of regulatory and financial questions that may not have easy answers. Due to the politically sensitive nature of the trans-Pacific merger, it is also subject to unusual regulatory hurdles, as well as swings in public sentiment that cannot be measured easily. As such, investors would be foolish to assume that this is a done deal.

Smithfield Foods, Inc. (NYSE:SFD)

However, there is a real possibility that this deal will go through. Such an outcome could be quite profitable for investors who position themselves correctly. In preparation, interested parties should take the time to compare Smithfield Foods, Inc. (NYSE:SFD) against its closest competitors.

Although Smithfield Foods, Inc. (NYSE:SFD) is the largest American pork producer by volume, it competes againstseveral other big-name companiesthat sell fresh and processed meat products in North America. These include Austin, Minnesota-based Hormel Foods Corporation (NYSE:HRL) and Springdale, Arkansas-based Tyson Foods, Inc. (NYSE:TSN) .

Thanks to their diversified asset portfolios and operational structures, both of these competing firms are larger than Smithfield Foods, Inc. (NYSE:SFD). At last check, Hormel Foods Corporation (NYSE:HRL)’s market capitalization came in at $10.4 billion, and Tyson Foods, Inc. (NYSE:TSN) sported a valuation of nearly $9 billion. By comparison, Smithfield Foods, Inc. (NYSE:SFD)’s post-announcement market capitalization is about $4.6 billion. Revenue-wise, Smithfield splits the difference between Hormel Foods Corporation (NYSE:HRL) and Tyson Foods, Inc. (NYSE:TSN). Its gross 2012 revenue figure of $13.1 billion exceeds that of Hormel Foods Corporation (NYSE:HRL) by about $5 billion and falls short of that of Tyson Foods, Inc. (NYSE:TSN) by around $20 billion. During the same period, Smithfield reported a final income of $233.6 million. By contrast, Hormel Foods Corporation (NYSE:HRL) earned around $500 million. Tyson Foods, Inc. (NYSE:TSN) eked out a relatively narrow profit of about $530 million.

Smithfield’s leverage is significant and could serve as a complicating factor for the proposed merger. In 2012, the company reported cash reserves of about $140 million and a debt load of about $2.4 billion. Tyson Foods, Inc. (NYSE:TSN) also has some debt troubles: during the same reporting period, the company disclosed a cash hoard of $809 million and about $2.4 billion in debt. Hormel Foods Corporation (NYSE:HRL) had a more even balance of $263 million in cash and $250 million in debt.

How the Deal Is Structured

Under the terms of the proposed merger, Shanghui will issue cashpayments of $34 per share to Smithfield shareholders of record as of a yet-to-be-determined date. Relative to Smithfield’s pre-announcement closing price, this represents a 25 percent premium. Although the company’s share price has fluctuated somewhat since the deal’s announcement, it remains about $1 per share lower than Shanghui’s offer price. As such, investors can still take advantage of a 3 percent arbitrage premium. Of course, this premium is dependent on the deal’s closing. In the event that the merger falls through, Smithfield’s value would likely fall to its pre-announcement levels.

Complicating Factors and Regulatory Issues

This relatively straightforward deal is made more complicated by the regulatory and political issues that surround it. By American standards, the food-safety record of China’s pork-processing industry is abysmal. Although Shanghui and Smithfield have both insisted that the combined company will adhere to the North American regulatory framework under which it must operate, rank-and-file customers are understandably nervous about the transition. Whether or not this is an overreaction, it could have a very real impact on the company’s bottom line. If American consumers temporarily or permanently shift their eating habits away from pork products, investors will be quick to pass judgment and could punish the combined firm’s shares accordingly.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!