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. Fitch says that it views 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,” the company said. “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" (January 2013).
"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
Source: Fitch Ratings