Smithfield Foods, Inc. (NYSE:SFD) has received a lot of attention from the investment community with its recent buyout offer from the Hong Kong-based holding company Shuanghui International. The Chinese company offered to acquire Smithfield Foods, Inc. (NYSE:SFD) at around $34 per share, with the total transaction value of $7.1 billion including Smithfield’s debt.
Interestingly, in the middle of June, activist investment fund Starboard Value, the owner of a 5.7% stake in the company, wrote a letter to Smithfield’s board of directors suggesting that the company could be worth much more than Shuanghui’s buyout offering price.
Smithfield appears quite undervalued
In the letter, Starboard announced that it became Smithfield Foods, Inc. (NYSE:SFD)’s shareholder in March, two months before Shuanghui’s merger offer. It believes that Smithfield is worth much more than $34 per share, based on its sum-of-parts valuation. Smithfield operates in three main business segments: Hog production, international and pork. Starboard agrees with Smithfield’s management that hog production “was one of the most valuable assets within the company,” with around 851,000 sows producing 16 million hog annually.
The valuation of the hog-production segment was based on the asset-value basis due to the high volatility of hog-farming profitability, which is caused by the fluctuations in feed inputs and hog prices. Thus, in order to value the hog- production business, Starboard took into account the value of sows at market prices, unborn pigs, live hog inventory and the land and production facility values. With the per-sow space estimates of around $1,100 to $1,600, hog production could be worth around $1.9 billion to $2.3 billion.
For the international segment, what makes Starboard excited is Smithfield Foods, Inc. (NYSE:SFD)’s operations in Poland and Romania. With the market-leading position, Smithfield’s Polish operation might have a premium valuation at 6.5 to 7.5 times its earnings before interest, taxes, depreciation and amortization (EBITDA), including 25% of sales from the more volatile hog-production business.
In the Romanian market, Smithfield also enjoyed being the market leader, with around 30% market share. However, the hog-production business accounted for a greater percentage of sales than in the Polish market, at around 40% of the total sales. Consequently, it should have a lower valuation of 5.5 to 6.5 times its EBITDA.
Consequently, while the Polish operation was valued at $586 to $713 million, the Romanian operation might be worth around $358 to $455 million. Including a 37% stake in Campofrio Food and the Mexican joint-venture stake, the value of the international segment was around $1.3 billion to $1.5 billion.
Last but not least, the pork segment, the biggest revenue and EBITDA contributor for Smithfield Foods, Inc. (NYSE:SFD), could be seen as the biggest pork-processing business globally. In the period of 2007 to 2012, the segment’s EBITDA climbed from $345 million to $752 million, with the EBITDA margin fluctuating in the range of 4.3% to 8.6%.
Interestingly, Starboard pointed out that Shuanghui’s $34 per-share offer would undervalue the Smithfield Foods, Inc. (NYSE:SFD)’s pork business after deducting the value of the hog- production segment and the international segment. Starboard calculated that the implied pork business’ EBITDA multiple would only be 4.7 to 5.8, a much lower valuation than the company’s peers including Hillshire Brands Co (NYSE:HSH) and Hormel Foods Corporation (NYSE:HRL).
