Smithfield US homecoming looks like pig in a poke

WH

30/10/2023 14:54

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Chan Ka Sing
       HONG KONG, Oct 30 (Reuters Breakingviews) - Finding a
hedge against volatile East-West geopolitics has become a
corporate imperative. For the Chinese owners of pork meat giant
WH Group  0288.HK , this means turning back the clock and
carving out its U.S. unit Smithfield Foods, acquired a decade
ago for $7.1 billion including debt. The takeover has struggled
to deliver savings to its suitor. Decoupling the two might not
unlock much value either. 
    When it listed in Hong Kong in 2014, WH Group’s big selling
point was its plan to import cheaper American pork to China and
to integrate Smithfield’s advanced hog farming know-how to
improve the profitability of its mainland business. Those
benefits did not fully materialise. Operating profit margins for
the group’s China operations hardly moved beyond 10% in the past
10 years, company filings show.
    The world’s biggest hog firm is now discussing with
investment banks on ways to boost its slumping valuation,
including a U.S. listing, the Wall Street Journal reported on
Oct. 19. Trading near a record low, WH Group is currently worth
$7.6 billion on the Hong Kong stock market, just above what it
valued its American rival in 2013.  
    Investors appear to attribute little worth to the Smithfield
business. WH Group’s 70% stake in China’s biggest pork processor
Henan Shuanghui Investment & Development  000895.SZ , the other
business the Hong Kong-listed company controls, is alone worth
about $9 billion. That’s not far from the total value of WH
Group of just over $10 billion including net debt.  
    One option to unlock value is to take Smithfield public
again in New York, where companies in the S&P 500 Index  .SPX 
trade on average at 24 times their earnings against 8 times for
companies in the Hang Seng Index  .HSI . The gloom that is
currently engulfing Hong Kong’s valuations, chiefly a reflection
of China’s slowing economy amid a property crisis, may hide the
true value of WH Group. Chinese ownership has allowed
Smithfield’s sales to climb to nearly $18 billion from $13
billion in 2013, CEO Shane Smith argued in March. At 0.5 times
its 2022 revenue, the average multiple for listed meat producers
such as Tyson Foods  TSN.N , Sysco  SYY.N  and JBS  JBSS3.SA , a
relisted Smithfield could be worth almost $9 billion, including
debt, Breakingviews calculations show. 
    Yet several issues cloud a market debut. WH Group’s
investment story was built on the prospect of closer trade ties
between the People’s Republic and the U.S. but the exact
opposite has happened, sapping Western investor appetite for
Chinese assets. 
    WH Group’s governance is also a concern. Founder Wan Long,
81, is still labouring on his succession plan while repairing
the damage arising from a nasty family feud in 2021. Details of
the drama, which saw Wan’s son accusing his father of taking
illegal profit from the Smithfield purchase, are likely to spill
onto the IPO prospectus, further deterring investors.  
    A Smithfield return trip to the U.S. would help Wan and some
of his equity backers split geopolitical risks across its
business. Not many investors may ride with them if Beijing’s
relation with Washington remains a pigsty. 

    CONTEXT NEWS
    WH Group is working with banks to spin off its U.S.-based
pork processing unit Smithfield Foods and is planning a listing
that could happen early next year, the Wall Street Journal
reported on Oct. 19. 
    The Chinese pork giant bought Smithfield in 2013 for $7.1
billion, including debt, in what was the biggest takeover of an
American company by a private sector Chinese firm at the time. 

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Operating profit margin of WH's China business    https://tmsnrt.rs/40drqWV
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 (Editing by Lisa Jucca, Katrina Hamlin and Thomas Shum)
 ((For previous columns by the author, Reuters customers can
click on  CHAN/  
KaSing.Chan@thomsonreuters.com; Reuters Messaging:
KaSing.Chan.thomsonreuters.com@reuters.net))