Smithfield Foods on a Fast Boat to China Now

Starboard Value has thrown in the towel. The activist hedge fund operator that had opposed the sale of pork producer Smithfield Foods to a Chinese meat processor said it can't cobble together a deal that would supersede the one received from Shuanghui International Holdings, and it will reluctantly vote in favor of the sale.

Unlike the noisy but ultimately all-for-show scrutiny the merger got from politicians in Washington -- some of whom raised ludicrous objections to it on "national security" grounds -- Starboard's opposition had merit. It said the $4.7 billion deal, or $34-per-share offer, didn't provide enough value to shareholders, and one of its proposals was the piecemeal sale of the company. It reasoned that Smithfield's parts were more valuable than the whole, estimating investors could realize as much as $55 per share selling the company that way.

There are three distinct businesses Smithfield maintains: its packaged meats division, hog productions, and international. The last is primarily its European processing and distribution operations in Poland, Romania, and the U.K., though it has facilities in Mexico, too.

Smithfield is the biggest hog producer in the world, larger than its next three largest competitors combined, and is the top pork processor as well, bigger than Hormel , JBS, and Tyson Foods . It also happens to be the top packaged pork company in the U.S.; packaged pork was its biggest and most profitable segment, providing 47% of its $13 billion in revenue and more than 90% of its profits last year.

Despite its preeminent position in hog production, which contributed to its pork segment's fresh pork sales, it is working in a highly volatile market that offers low profitability. In fact, Smithfield lost $119 million last year, a big swing from the $166 million profit it made the year before.

Management itself has said the hog business is a drag on its profitability and is not its main focus. CEO Larry Pope admitted Smithfield wasn't trying to maximize profitability on its hog farms, as its real business was the packaged meat business. Furthermore, when you look at its rivals in the industry like Hormel and Hillshire Brands , you see that no one else is as vertically integrated as Smithfield.

As for its international business, there are no real synergies it's been able to derive, and, more often than not, it's been subject to the negative effects of currency fluctuations.

In short, Smithfield has been a laggard compared to its competitors in terms of total return to its shareholders.

SFD Total Return Price data by YCharts.

So Starboard Value had a good reason to want to break up the company. However, despite being in talks with possible investors to buy the company in its entirety, it was unable to put the necessary pieces in place in time for tomorrow's scheduled vote on the merger.

With a 5.7% stake in Smithfield, Starboard will be throwing its weight behind the union now and the meat processor will move out of the public markets. Even so, I still grade Tyson a tasty investment. While Hormel has been a top performer over time and there's nothing to suggest it still won't be, I see Tyson's broader portfolio smoothing out volatility from any one particular meat.

Pig in a poke
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