Sun Merger Sub, Inc., an indirect wholly-owned subsidiary of Hongkong-based meat processor Shuanghui International Holdings Ltd, has closed the pricing of senior notes aggregating $900 million, which was announced in mid-July. Sun Merger Sub will later merge with U.S. pork processor Smithfield Foods, Inc. after the proposed merger of Smithfield with Shuanghui.
These notes were offered to qualified institutional buyers in the U.S. in two series. One series of senior notes with principal amount of $500 million carried an interest rate of 5.250% and will mature in 2018. The other one, with a principal amount of $400 million, carried an interest of 5.875% and will mature in 2021.
The net proceeds from the note offering were 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 has 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 accounts for about 50% of the world's pork consumption.
Smithfield holds a Zacks Rank #3 (Hold), while other meat producers like Pilgrim’s Pride Corp and Tyson Foods Inc are better placed and hold a Zacks Rank #2 (Buy). Another consumer staples stock worth considering is B&G Foods Inc with a Zacks Rank #1 (Strong Buy).