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

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top 6 Tax Scams and How to Protect Yourself

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

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!