WH Group's US spinoff can undo hamfisted bet

WH

23/07/2024 12:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own. Refiles to fix grammar in the 3rd
paragraph.)
    By Hudson Lockett
       HONG KONG, July 23 (Reuters Breakingviews) - WH Group's
 0288.HK  $7.1 billion take-private of Smithfield Foods, to be
fair, looked promising in 2013. Back then, China was consuming
ever-more imported pork while trade between the world's two
biggest economies was booming. Selling cheap American white meat
to Chinese diners seemed a no-brainer.  
    That narrative quickly unravelled during the multiyear trade
war launched by Donald Trump, whose potential return to the
White House could end up driving China’s current 25% tariff on
U.S. pork imports still higher. Even absent another Trump
presidency, Beijing has now made a priority of becoming
self-sufficient in the dining-table staple after African swine
fever wiped out half of its national hog herd in 2019. 
    Yet the darkening prospects of U.S.-China trade could play
to WH Group's favour. The Hong Kong-listed company, which also
holds a controlling stake in China’s biggest pork processor
Henan Shuanghui Investment & Development  000895.SZ , is
planning to relist Smithfield's U.S. and Mexico businesses in a
deal that could raise at least $1 billion, IFR reported, citing
sources. Unlike other recent listings exposed to Chinese
consumers, such as Anta Sports Products-owned  2020.HK  sporting
goods group Amer Sports  AS.N , the Virginia-based company is a
reasonably pure play on American appetite for the food item.
   WH Group's investors currently ascribe little or no worth to
Smithfield. The parent's 70% stake in Shenzhen-listed Shuanghui
is already worth just over $8 billion, nearly WH's entire market
capitalisation. In 2023, Smithfield's U.S. and Mexican
operations generated $330 million of operating profit. Using the
average 22 times earnings before interest and tax multiple that
U.S-listed peers like Hormel Foods  HRL.N  and Tyson Foods
 TSN.N  trade on, Smithfield's enterprise could be worth $7.3
billion.   
    It is true that the North American business was a serious
drag on WH Group’s results last year. In the face of
industry-wide oversupply and high feed prices, operating profit
from the U.S.-Mexico region fell almost two-thirds on the back
of a $624 million loss for upstream operations, such as hog
farming. But relentless cost-cutting at Smithfield has shrunk
that loss considerably, fuelling a 73% year-on-year rise in
earnings for WH Group in the first quarter. 
    A spinoff of Smithfield could provide a welcome windfall for
WH Group just as China’s pork industry is working to put its own
surplus issues behind it. Sometimes a reversal is just what’s
needed.
    Follow @KangHexin on X
    
    CONTEXT NEWS
    WH Group, the world’s largest pork producer, plans to list
Smithfield Foods’ U.S. and Mexican business in New York,
according to a filing with the Hong Kong stock exchange on July
14.
    The spinoff could raise at least $1 billion, according to
IFR. Shares in the group have fallen more than 12% since listing
in Hong Kong in 2014 following the Smithfield acquisition.

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Graphic: China pork purchases wane after swine fever-driven
spike    https://reut.rs/4cRhacj
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 (Editing by Robyn Mak and Aditya Srivastav)
 ((For previous columns by the author, Reuters customers can
click on  LOCKETT/  
hudson.lockett@thomsonreuters.com))