Does Smithfield Foods, Inc. (SFD) Have a Good Deal?

Recently, Smithfield Foods, Inc. (NYSE:SFD) has received a merger offer of $34 per share from the Hong Kong-based holding company, Shuanghui International Holdings. At $34 per share, the deal is valued at as much as $7.1 billion, including Smithfield’s net debt. Since the beginning of the year, Smithfield has advanced significantly, by more than 52.4%.

Let’s take a closer look to see whether or not Smithfield Foods, Inc. (NYSE:SFD) is fairly valued at the acquisition price.

Smithfield Foods, Inc. (NYSE:SFD)

Business snapshot

Smithfield is the producer of a wide range of fresh meat and packaged meat products, operating in four main business segments: Pork, Hog Production, International and Corporate. Most of its revenue, $11 billion, or 70.5% of the total revenue, was generated from the pork segment while the hog production produced more than $3 billion in 2012 revenue. The pork segment was also the biggest profit contributor, with $623.7 million in operating profit. Hog production ranked second, with $166.1 million in income while the International segment generated only $42.8 million in operating profit in 2012.

In the past ten years, Smithfield has managed to grow its revenue from $7.9 billion in 2003 to more than $13 billion in 2012. Net income has grown from $26 million to $361 million during the same period. However, Smithfield Foods, Inc. (NYSE:SFD) produced losses of $190 million in 2009 and  $101 million in 2010, respectively. The losses were due to much higher cost of goods sold and higher interest expense.

Smithfield Foods, Inc. (NYSE:SFD) seems to have quite a strong balance sheet. As of January 2013, it had more than $3.2 billion in equity, $138.6 million in cash and more than $1.85 billion in long-term debt and capital lease obligations. The majority of its assets, $2.39 billion, were inventories while the goodwill and intangible assets were more than $1.18 billion. Consequently, its tangible book value was more than $2 billion. At $34 per share, Smithfield Foods, Inc. (NYSE:SFD) is worth more than $4.7 billion on the market. The offering price values Smithfield Foods at nearly 8.7 times Enterprise Value over Earnings Before Interest, Taxes, Dividends and Amortization (EV/EBITDA).

Hormel Foods is really a dividend stock

Smithfield’s valuation is lower than Hormel Foods Corporation (NYSE:HRL), but higher than Tyson Foods, Inc. (NYSE:TSN).

Hormel Foods is trading nearly $39 per share, with the total market cap of $10.3 billion. The market values Hormel Foods Corporation (NYSE:HRL) at as high as 12.5 times EV/EBITDA. Hormel Foods has just recently reported its second quarter earnings results. Its revenue rose by 6.9% to more than $2.15 billion. However, its earnings declined a bit, from $127.9 million in the second quarter last year to $125.5 million in the second quarter this year. For the full year,

Hormel Foods Corporation (NYSE:HRL) maintained its full-year earnings per share (EPS) estimate in the range of $1.93 to $2.03 per share. What might attract income investors to Hormel Foods is its consistent dividend payment in the past ten years. Since 2003, its dividend has increased from $0.21 per share to $0.60 per share. In the second quarter earnings announcement, Hormel also announced that it paid quarterly dividend of $0.68 per share.