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Smithfield to Offer Senior Notes

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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. will initiate an $800 million senior note offering. Sun Merger Sub is an indirect wholly-owned subsidiary of Shuanghui and will merge with Smithfield at the time of the acquisition.

The notes will be offered to qualified institutional buyers in the U.S. in two series, with one series due in 2018 and the other in 2021.

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 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 to the 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.

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 Sanderson carry a Zacks Rank #1 (Strong Buy), Tyson and Pilgrim’s Pride holds a Zacks Rank #2 (Buy).

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