Smithfield Foods, Inc. (SFD) Buyout? Not So Fast, Says Starboard

A few weeks ago, Chinese company Shuanghui International announced a $34 per share bid for Smithfield Foods, Inc. (NYSE:SFD), a large producer of pork and other meat products. The stock had been trading at about $26 prior to the announcement, so this takeover price represented a substantial premium for shareholders. However, activist Jeffrey Smith’s Starboard Value has not been impressed. The fund recently filed a 13D with the SEC, reporting a position of nearly 8 million shares or 5.7% of Smithfield Foods, Inc. (NYSE:SFD). In a letter accompanying the 13D, Smith and his team argued that Smithfield management should pursue a breakup of the company rather than a sale. A breakup of the company, including sales of some of the pieces, could end up valuing the company at around $50 per share according to Starboard’s analysis.

We track quarterly 13F filings from hundreds of hedge funds such as Starboard as part of our work researching investment strategies (for example, we’ve found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year). Our database shows that Starboard initiated a position of 375,000 shares in Smithfield Foods, Inc. (NYSE:SFD) in the first quarter of this year (see more of Smith’s stock picks). This suggests that the activist fund likely was planning to build a stake and push management to break up the company. In addition to Starboard, other filers we track who owned Smithfield at the end of March included billionaire Steve Cohen’s SAC Capital Advisors (find Cohen’s favorite stocks).

Starboard came to its conclusion by independently valuing each of Smithfield Foods, Inc. (NYSE:SFD)’s three segments. As a vertically integrated pork producer, the company owns its own hog farms; the fund claims that the pork segment could independently contract for hogs as it currently does for some of its supply. Therefore, selling this division would not negatively impact the rest of Smithfield Foods, Inc. (NYSE:SFD)’s businesses, and the middle of the range of valuations Starboard assigns to this segment is $2.1 billion. The company’s various international brands (which are mostly sold in Europe) give another $1.4 billion in their analysis. That leaves the pork division. By subtracting out the figures we’ve previously mentioned from the current enterprise value, Starboard claims the pork division is valued at only 4 to 5 times trailing EBITDA.

For purposes of comparison, Hillshire Brands Co (NYSE:HSH) and Hormel Foods Corporation (NYSE:HRL) trade between 8 and 10 times trailing EBITDA.