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Smithfield Shareholders Approve Merger

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Overcoming safety concerns and a rigorous review process, shareholders of U.S. meat producer Smithfield Foods, Inc. have finally approved the company’s proposed merger deal with Hongkong-based Shuanghui International Holdings Limited. Smithfield shareholders unanimously approved the decision as more than 96% of the votes were cast in favor of the deal during a special meeting yesterday.

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 is expected to close on Sep 26, after which Smithfield will not trade publicly and will become a wholly-owned subsidiary of Shuanghui. It will operate as Smithfield Foods. There will be no change in the company’s management team and all the employees of Smithfield will be retained.

The deal comes at a time when China is facing serious food safety issues, which also raised questions over this merger. U.S. regulators were concerned that the deal would jeopardize the American food supply chain and harm the entire U.S. pork industry as they did not find Shuanghui’s food safety practices in China acceptable.

However, Smithfield’s CEO had assured that the transaction will have no impact on the U.S. food supply and the company will continue to produce pork maintaining highest food safety standards and abiding by the U.S. regulations. The Committee on Foreign Investment in the United States (CFIUS) approved the proposed merger deal on Sep 6 after a 45-day review period in order to check the food safety standards.

Initially, one of Smithfield’s shareholders, Starboard, with beneficial ownership of approximately 5.7% did not favor the deal. Starboard was of the opinion that it will be in the best interest of the shareholders if Smithfield divests its various divisions like pork, hog production and international business individually rather than divesting the whole business all at once.

Smithfield was also under pressure from another major shareholder, Continental Grain, which urged the Smithfield board to break up the company before the announcement of the Shuanghui deal. But later, both consented to the Chinese offer.

We note that Smithfield’s results have been sluggish since the last few years as a result of higher grain costs and declining pork demand. The company was also not able to increase pork prices owing to the restricted consumer spending environment, which led to losses.

The deal is the largest ever Chinese takeover of a U.S. company and will open the doors for 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.

Smithfieldholds a Zacks Rank #4 (Sell). Meat producers that are better placed and are worth considering include Pilgrim’s Pride Corp (PPC - Snapshot Report) and Tyson Food Inc (TSN - Analyst Report) which hold a Zacks Rank #2 (Buy). Another food company Pinnacle Foods Inc (PF - Snapshot Report) with a Zacks Rank #1 (Strong Buy) is also worth considering.

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