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In order to fund the proposed merger of U.S. pork processor Smithfield Foods, Inc. with Hongkong-based meat processor Shuanghui International Holdings Ltd, Sun Merger Sub, Inc. recently announced the pricing of senior notes aggregating $900 million, an extension of its $800 million offering announced last week. Sun Merger Sub is an indirect wholly-owned subsidiary of Shuanghui and will merge with Smithfield at the time of the acquisition.
As was previously discussed, these notes will be offered to qualified institutional buyers in the U.S. in two series. One series of senior notes with principal amount of $500 million will carry an interest rate of 5.250% and will mature in 2018. The other one with a principal amount of $400 million will bear an interest of 5.875% and will mature in 2021.
The notes offering will close on Jul 31. Upon closing, the net proceeds from the note offering will be deposited into an escrow account, from where the proceeds will be used to fund the acquisition partially.
Per the deal signed on May 30, Shuanghui will acquire all of the outstanding shares of Smithfield for $34.00 per share, totaling $7.1 billion, including Smithfield’s debt. The deal will allow Smithfield to expand its footprint in China taking advantage of Shuanghui's solid distribution network.
As far as Shuanghui is concerned, it will be able to meet the growing demand for pork in its domestic market by gaining control of Smithfield’s brands such as Smithfield, Armour and Farmland.
The deal is expected to close in the second half of 2013 and enjoys the support of local, state and national elected officials, industry labor unions, U.S. hog farmers, leading economic and international affairs academics and even U.S. based food industry peers. However, the transaction is yet to receive shareholder and related federal regulatory approvals.
U.S. regulators are concerned about the unfavorable effects of the deal, if any, on the American food supply chain and the U.S. pork industry. They are apprehensive of Shuanghui’s food safety practices in China. Last week, however, Smithfield’s CEO confirmed that the transaction will have no impact on U.S. food supply and that it will continue to produce pork in compliance with U.S. food safety regulations.
We believe the deal will prove to be a boon for Smithfield as it will provide opportunities to increase the presence of its brands in China. It will also be able to meet the rising demand for pork in China, which consumes about 50% of the world's pork consumption.
Smithfield holds a Zacks Rank #3 (Hold). Meat producers like Pilgrim’s Pride Corp (PPC - Snapshot Report) and Sanderson Farms Inc (SAFM - Snapshot Report) and Tyson Foods Inc (TSN - Analyst Report) are better placed and are worth considering. While Sanderson carries a Zacks Rank #1 (Strong Buy), Tyson and Pilgrim’s Pride hold a Zacks Rank #2 (Buy).