CHICAGO NEW YORK–(BUSINESS WIRE)–
China’s largest meat processor’s proposed buyout of Smithfield Foods,
Inc. highlights the significant intrinsic value of U.S. protein assets,
according to Fitch Ratings. Shuanghui International Holdings Limited
Wednesday said it intended to buy Smithfield for $4.7 billion.
The $4.7 billion deal price values Smithfield at $7.1 billion, inclusive
of $2.4 billion of total debt at Jan. 27, 2012, and represents a 31%
premium over the firm’s stock price on May 28, 2013. The buyout multiple
is roughly 9.0 times (x) Smithfield’s LTM EBITDA of $787 million. We
view the multiple as reasonable based on historical prices paid for
commodity-oriented firms and believe it reflects both an export and
packaged meats premium.
Fitch also views completion of the deal as probable, despite political
concerns around foreign-ownership of U.S. food assets and potential
negative implications for U.S. consumers. Smithfield is the largest hog
producer and pork processor in the U.S., with about 14% and 26% market
share, respectively, according to company filings. Increased exports to
China could initially lower pork availability in the U.S. and result in
higher protein prices domestically.
We believe the buyout is positive for both parties. Shuanghui has access
to a high-quality source of fresh pork during a time when Chinese
consumers have heightened concerns about food safety. Moreover, the
transaction allows Smithfield to keep its vertically integrated
operations intact, provides an enhanced platform for future growth and
delivers a hefty immediate return to shareholders.
Based on Fitch’s cursory analysis, Shuanghui – which is owned by a
global group of private equity firms – appears to be financially stable.
Morgan Stanley is expected to provide about $3 billion in financing and
the remaining $1.7 billion could be funded by Shuanghui’s equity
sponsors. Smithfield’s debt has “change of control” provisions, which
will be triggered as a result of the buyout.
Fitch withdrew its ‘BB’ issuer default rating on Smithfield on Oct. 31,
2012 but continues to rate Tyson Foods, Inc. (TSN: Tyson; rated
BBB/Positive), Hillshire Brands Co. (HSH: Hillshire; rated BBB/Stable),
JBS S.A. (JBS; rated BB/Stable) and Cargill Inc. (Cargill; rated
A/Negative). We believe credit risk varies across these firms due to
differences in financial leverage and cash flow stability.
Past acquisitions of U.S. protein firms include Brazilian-based JBS’s
purchase of a controlling stake of then-bankrupt U.S.-based chicken
producer Pilgrim’s Pride Corp. (Pilgrim’s) in 2009 in a deal valuing the
entire firm at about $2.8 billion, or roughly 7.0x Pilgrim’s normalized
EBITDA. Pilgrim’s creditors were repaid in full when the firm was
acquired, even while the firm was operating under bankruptcy protection.
In 2007, JBS also purchased U.S.-based beef and pork processor Swift
Co. for $1.5 billion, including the assumption of the firm’s debt.
For additional information, see the following Related Research:
“Fitch: China Food Safety Concerns Could Taint Profits” (February 2013)
“Fitch: Hillshire, Tyson Viewed as Fierce Value-Added Competitors”
“2013 Outlook: U.S. Commodity Protein, Produce, and Dairy: Pricing and
Efficiency Becomes Paramount as Additional Divestitures/Spin-Offs are
Limited,” (December 2012).
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
2013 Outlook: U.S. Commodity Protein, Produce, and Dairy
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Carla Norfleet Taylor, CFA, +1 312-368-3195
Fitch Ratings, Inc.
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Wesley E. Moultrie II, CFA, +1 312-368-3186
Managing Director, Corporates
Kellie Geressy-Nilsen, +1 212-908-9123
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Brian Bertsch, +1 212-908-0549