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Chris DeMuth Jr. is the founder of Rangeley Capital LLC. Rangeley is an investment firm that focuses on event driven, value-oriented investment opportunities. Rangeley Capital and his value investing forum, Sifting the World (StW), search the world for misplaced bets. Rangeley exploits them for... More
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  • Smithfield Foods, Inc. (SFD) 5 comments
    Aug 29, 2013 3:08 PM | about stocks: SFD, TSN, KKR, BX

    Smithfield Foods, Inc. (NYSE:SFD) is currently the target of a definitive deal with Shuanghui. The deal price is $34 per share and the deal will probably close by November 1, 2013. The annualized yield on the merger arbitrage spread is thus about 7%. So far, that does not sound as if it is anything spectacular. However, while the current deal is likely to go through as planned, there are also a number of attractive alternative scenarios that could play out over the course of the next few months that could bring shareholders value of closer to $55 per share.

    Alternative bidders include Thailand's CP Foods, JBS, Tyson Foods (NYSE:TSN), KKR (NYSE:KKR), or Blackstone (NYSE:BX). CP Foods would probably bid for SFD if the existing deal falls through. While the rise in interest rates this year has discouraged CP Foods, they also described the process as rushed and acted as if SFD was not fully shopped.

    Activist shareholder Starboard owns over 5% of SFD and believes that the company would be better served by breaking up before selling. Their sum of the parts valuation indicates a view that the shares are worth between $44 and $55.

    Deal Price

    The buyers are paying between 8-9x EV/EBITD, which is beneath the 12x EV/EBITDA of the historical comparable transactions.

    Congressional Grandstanding and Regulatory Reviews

    This deal will be the subject of a lot of congressional grandstanding. Freaking out about China is an important part of the work done on Capitol Hill. We do not anticipate that anything will come of it. Thus far, the reactions of members of congress have been position taking and not policy making. The deal secured Mexican and Polish approval on June 27, 2013. The deal secured HSR approval on July 12, 2013. The Ukrainian review remains outstanding but is unlikely to be an impediment. On July 24, 2013, SFD announced that it has entered into the second phase of their CFIUS review. The deal secured Russian approval on August 6, 2013.


    On July 31, SFD announced the closing of $900 million in senior notes.

    Remaining Process

    We expect a deal update on SFD's earnings call, which is scheduled for Friday, September 6, 2013.

    Stocks: SFD, TSN, KKR, BX
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  • Afanti Arbitrage
    , contributor
    Comments (47) | Send Message
    I'm still trying to develop an estimate for the odds of Starboard's campaign succeeding(or "failing" in a way that still leads to a higher bid). The current deal price does seem a bit low. Frankly it would be great if more over-hyped regulatory/congressional concerns would widen the spread, and allow an investor to enter with a larger margin of safety...
    30 Aug 2013, 12:56 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11810) | Send Message
    Author’s reply » I agree. What are the odds? Low. But, heads we probably get a modest return and tails we get a bump.
    30 Aug 2013, 04:59 AM Reply Like
  • Special Situations and Arbs
    , contributor
    Comments (1526) | Send Message


    US likely to clear $4.7bn Smithfield deal


    By Gina Chon in Washington and Neil Munshi in Chicago


    The $4.7bn acquisition of Smithfield Foods by Shuanghui International is likely to be cleared by the US Treasury department, moving it a step closer to what would be the largest ever Chinese takeover of a US company, according to people familiar with the matter.


    The Committee on Foreign Investment in the United States has signalled that it is leaning towards clearing the deal and the companies could learn of the body’s decision as early as Thursday, the people said. Cfius declined to comment. Smithfield, the US’s largest pig farmer, said it could not comment on the Cfius review.


    Nova Daly, who ran the Cfius process from 2006 to 2010, said that although he was not privy to the committee’s thinking, the deal was likely to be cleared “because there aren’t a whole lot of very serious national security issues attached to it”.


    Cfius approval would actually help allay the fears of politicians who have expressed concerns about the Chinese takeover of an American food supplier, said Stephen Heifetz, who represented the Department of Homeland Security on the committee from 2006 to 2010.


    “It enables the parties to say to the Hill that to the extent you have security concerns there [has been] a thorough security review undertaken by professionals,” said Mr Heifetz, a partner with Steptoe & Johnson in Washington.


    In a letter to Treasury secretary Jack Lew in June, a bipartisan group of senators called for a harder look at the deal on food security grounds, highlighting the sensitivity surrounding Chinese takeovers of American companies.


    In July, the senate agriculture committee held a hearing on the deal, with senators doubting whether such a transaction would proceed if it involved an American company taking over a Chinese one. The hearing coincided with the opening in Washington of annual US and China talks on foreign policy and economic issues.


    For that reason, even if Cfius approves the Smithfield acquisition, it is unlikely to open the floodgates for other Chinese takeovers of US companies, especially when it involves natural resources or sectors that raise national security concerns, like telecoms.


    So far the Chinese record has been mixed.


    After its $18bn bid for US energy producer Unocal failed in 2005 amid political opposition, the Chinese National Offshore Oil Company, or Cnooc, has found success recently in doing conservative deals in which it takes a minority stake in assets of US oil and gas companies.


    Cnooc’s boldest bid was its $15.1bn acquisition of Canada’s Nexen. But to gain Cfius approval earlier this year, the Chinese company had to give up operating control of Nexen’s Gulf of Mexico assets, a significant sacrifice for Cnooc, according to people familiar with the matter.


    Other Chinese companies have not had any luck in gaining Cfius approval, no matter how small the deal. In 2011, Chinese telecoms company Huawei decided to drop its effort to acquire $2m worth of assets from US technology company 3Leaf Systems after Cfius declined to clear the deal.


    Last year, Ralls Corp, a Delaware-based company owned by two executives from Sany Group, China’s biggest machinery manufacturer, was forced to unwind its purchase of wind-farm assets over “national security risks” raised by the parcels’ proximity to Navy airspace.


    With Smithfield’s many farms throughout the US, and its headquarters in military-heavy southern Virginia, such proximity issues could come up, said Mark Plotkin, chairman of the Cfius practice at Covington & Burling law firm in Washington. But any such concerns should be easily mitigated, he said.


    In the unlikely event Cfius recommends blocking the deal, its decision will be sent to the US president for a 15-day review period, after which he must decide whether to enforce the committee’s decision. But that is extremely rare, said Mr Plotkin.


    If the committee clears the deal, Smithfield faces a shareholder vote on September 24. It is widely expected to garner the majority of voting shares needed to approve the deal.


    However, Starboard Value, which holds a 5.7 per cent stake in the company, has said it will vote no on the measure. The activist hedge fund said in a letter to Smithfield earlier this week that it had received interest from third parties that would value the company at “substantially” above Shuanghui’s $34 a share offer.


    According to a proxy statement filed this month, the companies have received governmental merger approvals in Mexico, Poland and Russia, and are seeking approval in Ukraine.
    4 Sep 2013, 11:28 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11810) | Send Message
    Author’s reply » Good. Thanks for posting.
    5 Sep 2013, 07:42 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11810) | Send Message
    Author’s reply » Shuanghui International and Smithfield Foods Receive CFIUS Clearance:
    7 Sep 2013, 06:55 AM Reply Like
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