A ham in hand is worth more than two sows on the pen. Starboard Value, the activist fund that once thought that it could whip up a higher bid than Shuanghui’s $34/share offer for pork producer Smithfield Foods, has conceded that it will not be able to. So the Shuanghui deal will be done on Tuesday after a shareholder vote (Starboard will vote its 6 per cent stake in favour too). In a year marked by dissident investors upending deals, the Smithfield situation shows that management is not always overmatched by hedge fund wizards.
Starboard claimed that Smithfield’s real value has been understated since its disparate hog farming and pork processing businesses made valuating it confusing. Their analysis rested on a best-of-both-worlds approach. The hog farming business should be valued on how much the animals and land assets could fetch. The processing business could be conventionally valued as a multiple of cash flow. Selling the segments separately, Starboard said, could net shareholders between $44 and $52 per share. Thus, based on where Smithfield traded in the last year, the public market missed its value by up to 300 per cent.
A few weeks ago, after Starboard said that it had lined up buyers, Smithfield shares traded above the $34 offer. But this situation lacked the hallmarks of the other deals this year where agitation led to an improved offer. The Shuanghui offer came from a competitive sale process that even had a go-shop period attached to it. And there was no broad shareholder revolt. Even Continental Grain, which had also called for a break-up, sold its shares after the $34 price was announced. Starboard’s underlying analysis is compelling. but it proves too theoretical when lined up against a buyer paying in a juicy premium all in cash, all at once.