Smithfield IPO gets at meat of the M&A matter

WH

28/01/2025 13:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Jennifer Saba
       NEW YORK, Jan 27 (Reuters Breakingviews) - A pork deal
somehow failed to bring home the bacon, but it’s set to sizzle
now. China’s WH Group  0288.HK , which bought Smithfield Foods
more than a decade ago is on the verge of taking the U.S. deli
meat and hot-dog maker public again. The spinoff mainly
illustrates how so many buyers lard themselves with foolish
deals.
    In what was the largest acquisition of a U.S. company by a
Chinese one, WH Group paid $7.1 billion, including debt, for
Smithfield in 2013. The idea was to export cheaper pork and
pig-farming expertise to the People’s Republic. The reality, as
it so often does, turned out differently.
    Costly tariffs, an African swine flu that wiped out a large
swath of China’s hogs in 2019 and WH Group’s stagnant operating
margin undercut much of the transaction’s rationale. Since it
was bought, Smithfield – led by CEO Shane Smith since 2021 - has
improved the operating margin in the packaged meats division,
but overall revenue has only increased 11% compared to 41% for
peer Tyson Foods  TSN.N  from 2013 until 2023.
    Smithfield’s parent company trades at less than 5 times its
projected EBITDA for this year, according to Visible Alpha,
obscuring the U.S. subsidiary’s value on the Hong Kong bourse.
It makes the separation planned for Tuesday look sensible. At
the midpoint of Smithfield’s mooted $23 to $27 price range, the
equity would be worth about $10 billion. The enterprise,
including debt, at $11 billion, implies a valuation multiple of
8 times estimated 2024 EBITDA, on par with Kraft Heinz  KHC.O 
and Tyson Foods, and roughly the same as what WH Group paid.
    With just a 50% uplift in the 11 years since WH Group’s
acquisition, it’s hard to justify all the capital and other
resources deployed to do the deal. China’s Dalian Wanda Group
flexed similar ambition when it bought a controlling stake in
U.S. theater chain AMC in 2012 only to later retreat. Swiss
building materials company Holcim  HOLN.S  also is aiming to
attract more value for its North American division, built in
part from acquisitions, by hiving it off as a separately traded
company. Cross-border M&A in particular is fraught for so many
reasons, it’s a wonder acquisitive CEOs keep putting themselves
through the grinder.
    Follow @jennifersaba on X
         
    CONTEXT NEWS 
    Smithfield Foods, the U.S. division of Chinese pork producer
WH Group, priced its shares between $23 and $27 apiece ahead of
a planned initial public offering on Jan. 28. At the midpoint of
the range, the company would be worth $11 billion, including net
debt.
    WH Group bought the company in 2013 in a deal worth $7.1
billion, including net debt.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Smithfield's mooted enterprise value is right on par with US
peers    https://reut.rs/40BgMdj
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Jeffrey Goldfarb and Pranav Kiran)
 ((For previous columns by the author, Reuters customers can
click on  SABA/ 
jennifer.saba@thomsonreuters.com))