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China's Shuanghui to Buy Smithfield

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U.S.pork processor Smithfield Foods Inc. has agreed to its buyout by Hongkong-based meat processor Shuanghui International Holdings Ltd. for $7.1 billion, including debt.

Shuanghui will acquire all of the outstanding shares of Smithfield for $34.00 per share in cash. The deal is expected to close in the second half of 2013, once it receives shareholder and related federal regulatory approvals.

Following the completion of the deal, Smithfield will not trade publicly and will become a wholly-owned subsidiary of Shuanghui International Holdings Limited.  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. Virginia will continue to remain the headquarters of Smithfield and C. Larry Pope will carry on in his responsibilities as the company’s president and chief executive officer.

The deal is a strategic fit for Smithfield as it will be able to expand its footprint in China taking advantage of Shuanghui's solid distribution network. On the other hand, the deal will allow Shuanghui, which is a leading pork producer in China, to meet the growing demand for pork in the country by gaining control of Smithfield’s brands, such as Smithfield, Armour and Farmland that meet food safety standards. The combined company will thus have greater access to the aggressively growing Chinese and U.S. pork industries.

Smithfield has been under pressure to improve its business since the past few years. Smithfield’s results have been suffering since last few years as a result of higher grain costs. In addition, oversupply of hogs was resulting in lower hog prices, which along with higher grain costs was leading to margin declines. Smithfield was also uncertain about the performance of its Hog Production segment in the upcoming quarters.

Prior to this buyout offer, Smithfield was considering splitting itself up, being constantly pushed by its second-largest shareholder, Continental Grain Co., in order to improve its underperforming business and shareholder returns. Continental had suggested that Smithfield be split into three independent companies by divesting underperforming and volatile Hog Production business and selected European assets; and reinvesting the proceeds from asset sales in additional share repurchases. The suggestion also involved restructuring of the Packaged Meats segment.

We believe the deal will prove to be a boon for Smithfield, which has been struggling of late. It will provide opportunities to increase the presence of its brands in China and also meet the rising demand for pork.

Smithfield holds a Zacks Rank #4 (Sell). Meat producers like Pilgrim’s Pride Corp (PPC - Free Report) and Sanderson Farms Inc (SAFM - Free Report) , carrying a Zacks Rank #1 (Strong Buy), are better placed and are worth considering. Another consumer staple company which is worth considering is Flower Foods Inc (FLO - Free Report) which also holds a Zacks Rank #1.

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