Smithfield Foods, Inc. (SFD), Hormel Foods Corporation (HRL): Will This Huge Chinese/US Deal Go Through?

Political opposition to the deal is another wild card. While it is likely that Shanghui and Smithfield will be able to assuage the safety concerns of American regulators, public opinion is not so easy to control. If widespread political opposition emerges, Smithfield may look for a face-saving way to exit the transaction. Unfortunately, other potential buyers for the company would likely face intense regulatory scrutiny due to the consolidated nature of the American pork industry.

Should Shareholders Bet on This?

At this point, it is unclear whether this deal will go through as planned. Investors who wish to profit from its arbitrage premium can use options to hedge their bets or employ tight stops to prevent significant losses. Although Chinese companies have previously been permitted to buy American companies that operate in less politically sensitive industries, the country’s food supply is a different matter. Ultimately, investors will need to use their own resources and experiences to analyze this situation and make an educated call on the likelihood of success.

Long-Term Outlook and Possible Plays

If this merger does close, it could affect North American prices for pork and other meat products while reordering the continent’s agriculture industry. Although it is too early to say whether this merger will force smaller producers out of business or encourage other players to enter the fray at higher price points, it is clear that the status quo will not continue. Investors who believe that this is a positive development would do well to look more closely at this deal.

In sum, Shanghui’s merger offer for Smithfield Foods creates a fascinating situation with many moving parts. Investors who wish to play this deal must carefully analyze the regulatory and political implications of Shanghui’s offer and determine whether the merger is likely to pass muster. Those who wish to play this deal should consider taking long positions in Smithfield Foods to capitalize on the still-extant arbitrage premium. However, due diligence is essential: Given the uncertainty that surrounds the merger, investors who fail to hedge their positions could find themselves in a heap of trouble.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Will This Huge Chinese/US Deal Go Through? originally appeared on Fool.com is written by Mike Thiessen.

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