Pop the hood on the Smithfield deal
It's the largest buy of a U.S. agribusiness company in history. So, what does the Smithfield Foods Inc. acquisition mean to U.S. hog farmers?
The news Tuesday that the shareholders of Smithfield Foods Inc. have approved the pork powerhouse's acquisition by Chinese firm Shuanghui International Holdings Ltd. means little to nothing stands in the way of the $4.7 billion deal going through. The deal could be finalized as early as Thursday; 96% of shareholder votes were cast in favor of the deal, which could be finalized as early as Thursday, according to a company report.
How soon after that completion will U.S. hog farmers see their marketplace change? In the short-term, the effects likely won't be huge, says University of Missouri Extension ag economist Ron Plain.
"The key thing on profitability is feed costs. You take corn from $6.50 a bushel to $4.50 a bushel, that's going to make a bigger impact short-term than this Chinese deal," he says. "That's a big deal."
But there's reason to feel bullish on the company's continued status as the leading pork producer in the U.S. and its sustenance of marketshare and, in turn, prices it helps support for U.S. hog farmers. In other words, the Smithfield deal could help those farmers make more money in the long run.
"The Chinese market is huge, of course, and if the Chinese government is more friendly toward a Chinese company bringing pork in, that may well justify the price premium," Plain says, referencing the price -- 32% above market value -- Shuanghui paid for Smithfield. "If that turns out to be the case, it could be good news for lots of people back here. It could be a winning answer for everybody -- Smithfield and their competitors like the Tysons and Cargills of the world.
"If more U.S. pork goes to China, it leaves less U.S. pork here, so that's an advantage to those companies. U.S. hog values will go up. If that happens to be the case, it will be a win-win situation for a lot of people."
The reason for Plain's optimism for hog prices lies in that premium Shuanghui paid for Smithfield. One reason for the hefty offer could have been a push for full ownership and management by the Chinese company. But since company officials have said the pork giant's U.S. management will remain intact with some oversight from the Chinese leadership, that means there could be a more fundamental reason for the high value of the company.
"Keep in mind the Chinese company paid 32% above the shareholder value on the day of the bid, 32% above what the stock was trading the day of the announcement. That gap went away immediately. Why were they willing to pay that much premium? With some takeovers, the new owners think they can manage the company better or create some savings. Shuanghui officials said they didn't plan to change management or U.S. operations. That takes that off the table as a reason for a 32% premium," Plain says. "One would think that the Chinese firm that would decide to pay 32% above market value for Smithfield has reasons to believe government officials will be friendlier toward U.S. pork imports, and it wasn't entirely speculative on their part."