When Smithfield Foods waddles up to the trough, the other porkers stand aside. Fat from acquisitions, the company is the world's largest hog producer and pork processor. Its products include 50-plus brands of fresh pork and processed, value-added pork products including deli meats and prepared foods. Smithfield Foods sells its products under such brand names as Armour, Eckrich, Cook's, Farmland, John Morrell, Patrick Cudahy, Gwaltney, and Healthy Ones. Smithfield distributes its meats in the US and abroad, mainly in Mexico, Poland, Romania, and Western Europe. Founded in 1936 as The Smithfield Packing Co., the company was acquired in 2013 by China's largest meat producer, Shuanghui International.
Change in Company Type
The takeover is the largest to date of a US company by a Chinese firm. In September 2013 Smithfield and Shuanghui combined their operations in a deal valued at approximately $7.1 billion, including the assumption of Smithfield's debt. Hong Kong-based Shuanghui International is the majority shareholder of Henan Shuanghui Investment & Development Co., which is China's biggest pork producer. The deal has raised concerns in the US over food safety and security. Smithfield expects the deal to increase exports of its pork products to China.
Virginia-based Smithfield rings up nearly 90% of its sales in the US. The international business, which extends to a dozen countries overall, is comprised mainly is the company's meat processing and distribution operations in Poland, Romania, and the UK, as well as its interests in meat processing operations, mainly in Western Europe and Mexico. China, where pork consumption is increasing along with a growing middle class, presents a major growth opportunity for Smithfield.
In its last year as an independent company, Smithfield Foods reported $13.2 billion in sales in fiscal 2013 (ended April), a 1% increase versus the prior year. Net income declined by 49% over the same period. Higher volumes across all of its business segments were largely offset by lower domestic fresh meat and hog market prices and the effects of foreign currency translation. The steep decline in net income was due to a $120.7 million loss on debt extinguishment.
Mergers, Acquisitions, and Divestments
In pursuit of its strategy to acquire modest-sized companies that can easily be integrated into its existing business, Smithfield in May 2013 acquired a 50% stake in Kansas City Sausage Company, a leading US sausage and sow processor, for $35 million in cash. The purchase provides a growth opportunity in two key packaged meats categories -- breakfast sausage and dinner sausage -- and allows Smithfield to expand its sausage menu. Previously, in September 2012 Smithfield bought a 70% interest in North Carolina-based American Skin Food Group for $24.2 million in cash. The acquired company makes and supplies pork rinds to the snack food industry.
Looking to get back in the black following the economic downturn, Smithfield sold its 49% holding in turkey producer Butterball to majority owner Maxwell Farms for $175 million in 2010. Maxwell Farms subsequently sold a 50% stake in the venture to agribusiness giant Seaboard Corporation for $177 million. (The deal followed an earlier attempt by Smithfield to buy out Maxwell Farms' stake for $200 million.) Smithfield has been using the proceeds from the deal to pay down debt.
Smithfield is attempting to boost sales by placing more emphasis on the production of higher-margin precooked meats and entrees. However, the company is still in a commodity business, and low hog prices can depress earnings. Frustrated investors, looking for ways to better predict the ebbs and flows of Smithfield's sales, have urged the pork producer to rely less on derivative bets it has made on the futures market. The recent takeover of the company by Shuanghui International advances Smithfield's goal of further penetrating the vast Chinese market. (China is a leading consumer of pork.)
The pork giant has identified 12 major brand names on which it plans to focus its attention. It intends to improve its annual profitability by about $90 million by fiscal 2014 and anticipates its packaged meats business, which accounted for 56% of fiscal 2013 sales, will maintain its solid profitability. Though in past years Smithfield was getting fat on acquisitions, recently the pork provider has been concentrating on shedding excess weight. The company restructured its pork segment by consolidating numerous independent operating companies into three regional ones and shuttered half a dozen packaged meats plants and one fresh pork plant that had been deemed inefficient and underutilized. This effort also included consolidating its sales organization.
Beef was, at one time, an important part of Smithfield's diet. The company was once one of the largest beef processors in the US. However, in 2008 it sold its beef operations, Smithfield Beef Group (now JBS Packerland), and its feedlot joint venture Five Rivers Ranch Cattle Feeding to Brazilian meat giant JBS. Smithfield used the proceeds ($565 million in cash) from the sale to pay down debt. To sell the feedlot joint venture, Smithfield bought out the 50% interest that was owned by ContiGroup for some 2 million shares of its stock.