UPDATE 4-Big investor urges Smithfield breakup over buyout

Mon Jun 17, 2013 5:47pm EDT

* Starboard: Selling pieces could net $44-$55/shr

* Says looks to engage in talks with interested parties

* Smithfield shares gain 0.9 percent

By Martinne Geller

June 17 (Reuters) - Starboard Value LP revealed a major stake in Smithfield Foods Inc on Monday and urged the world's largest pork producer to explore a breakup rather than a planned $4.7 billion takeover by Chinese meat company Shuanghui International.

The activist investor, now Smithfield's biggest shareholder with a 5.7 percent stake, said Smithfield could be worth 29 percent to 64 percent more than the $34 per share offered by Shuanghui if it split up and shopped its hog production, pork and international units separately.

Some U.S. lawmakers have expressed concerns about food safety implications of the Shuanghui proposal, which would be a Chinese company's largest takeover to date of a U.S. firm.

Stock market reaction to the breakup proposal was muted. Smithfield shares rose 0.9 percent to $33.08, well below the valuation of $44 to $55 per share Starboard laid out in a letter to Smithfield's board, dated June 17.

"Continental Grain has made this case for several years and has not gotten anywhere with it," said Moody's analyst Brian Weddington. Continental, which had pushed for a split-up, sold its Smithfield shares after the Shuanghui deal was announced.

Analysts said Shuanghui, a pork processor, is most interested in Smithfield's hog processing unit, the most volatile of the three divisions. China is keen to secure a reliable pork supply for its burgeoning population.

Tom Graves, an analyst with S&P Capital IQ, said there is a basis for Starboard to seek a higher valuation in a breakup since the packaged food business is the most attractive.

"But we think the high end of Starboard's sum-of-the-parts valuation range is much higher than is likely to be realized," said Graves. He raised his price target to $34 from $33, reflecting an expectation that the Shuanghui deal will close.

Smithfield reaffirmed its recommendation that shareholders approve the deal, saying it had already considered different separation scenarios.

"The board unanimously believes that the transaction with Shuanghui is in the best interests of the company, its shareholders and all Smithfield stakeholders," Smithfield said in a statement.

LOTS OF INTEREST

U.S. Senate Agriculture Committee Chairwoman Debbie Stabenow, Democrat of Michigan, has said federal agencies considering the merger "must take China's and Shuanghui's troubling track record on food safety into account."

The companies insist the transaction was focused on exporting U.S. pork to China, not importing meat from China.

Starboard said it believes there are numerous interested parties for each Smithfield division and it "is looking to identify and engage in discussions with any third parties who may be interested." It did not identify any possible bidders.

Last month, Thailand's Charoen Pokphand Foods Pcl, controlled by billionaire Dhanin Chearavanont, said it considered bidding for Smithfield. Meat industry observers say other possible suitors for parts of Smithfield include Hillshire Brands Co, Tyson Foods Inc and Brazil's JBS SA . None of the companies has said they were interested.

Run by Jeffrey Smith, New York-based Starboard has run campaigns in recent months at Office Depot Inc, DSP Group Inc and Tessera Technologies Inc.

It was influential in Office Depot selling its Mexican business, has received some shareholder support on its director slate at DSP Group, and succeeded in replacing the board at Tessera. It was less successful at AOL Inc, where it lost a proxy fight last year.

Starboard's stake in Smithfield puts it ahead of Vanguard Group Inc, which owned 4.7 percent of the Virginia-based company as of March 31, according to Thomson Reuters data.

A spokesman for Shuanghui declined to comment. Continental Grain was not immediately available.

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