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SFD to Clear the Air on China Deal

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U.S.pork processor Smithfield Foods, Inc. has announced that its chief executive officer (CEO) C. Larry Pope will reassure the U.S Senate Committee on Agriculture, Nutrition and Forestry that Smithfield’s merger with Hongkong-based meat processor Shuanghui International Holdings Ltd. will not hurt the food safety standards of the U.S.

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 that meet food safety standards.

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.

The main concern for U.S. regulators is that the deal should not jeopardize the American food supply chain and harm the entire U.S. pork industry as they do not find Shuanghui’s food safety practices in China acceptable.

Smithfield’s CEO has thus confirmed that the transaction will have no impact on U.S. food supply and therefore it will continue to produce pork maintaining highest food safety standards for U.S. consumers and abide by the U.S. regulations.

In addition, Smithfield stated that it will continue its contracts with more than 2,000 family farmers even after the merger. Smithfield believes that the deal will create an opportunity for U.S. hog farmers to expand production.

Smithfieldalso assured U.S. regulators that there will be no change in the company’s management team and all the employees of Smithfield will be retained, following the completion of the deal. 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 CEO.

Smithfield’s results have been suffering since the last few years as a result of higher grain costs and declining pork demand. In addition, oversupply of hogs was resulting in lower hog prices, which along with higher grain costs led to margin declines.

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 takes about 50% of the world's pork consumption.

Smithfieldholds a Zacks Rank #3 (Hold). Meat producers like Pilgrim’s Pride Corp (PPC - Free Report) and Sanderson Farms Inc (SAFM - Free Report) and Tyson Foods Inc (TSN - Free Report) are better placed and are worth considering. While Pilgrim’s Pride and Sanderson carry a Zacks Rank #1 (Strong Buy), Tyson holds a Zacks Rank #2 (Buy).

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