Sanderson Farms trades above Continental Grain deal for second day in a row
Sanderson Farms (NASDAQ:SAFM) continued to trade through the $203/share planned sale to Continental Grain/Cargill amid a bullish note from Barclays on Tuesday that sees potential upside in a deal break.
"We continue to see very strong cash generation ahead and if the takeover by Cargill & Continental Grain were to fall through, we could see upside for SAFM from current levels," Barclays analyst Benjamin Theurer, who has an equal weight rating, wrote in a premarket note on Tuesday. SAFM gained 2.5% amid the Barclays note on Tuesday and the shares ticked down 0.6% on Wednesday, though the stock continues to trade at a 1.6% premium to the $203/share sale price.
Investors have been concerned that the Sanderson Farms sale may be blocked by the U.S. Justice Department, though the stock price indicates that they are not overly worried about a potential deal termination. CNBC's David Faber in early March reported the sale would likely be blocked unless some changes are made to the transaction.
If Barclays were to value the stock on simple DCF or target multiple, the price target would be $250/share based on "very strong" cash generation under certain circumstances, according to Theurer. The analyst sees modest downside case to $176 and a more optimistic upside case to $324.
If the Cargill takeover of Sanderson (SAFM) were to fall apart, SAFM would likely return most of the excess cash to holders, Theurer wrote. At current prices, this would imply an "extraordinary" dividend yield of almost 17%.
Skepticism about antitrust approval comes as Sen. Elizabeth Warren (D-MA) and others in February renewed a call for DOJ to scrutinize the deal because it raised "significant" antitrust concerns.
Recall in December the planned sale received a "second request" from the Dept. of Justice in regards to its antitrust review of the deal. From the start, when the deal was announced in August, it appeared that the deal was expected to see scrutiny from regulators.