It is one thing for an activist investor to oppose a merger deal and push for another bidder and a higher price. It is more unusual for an activist to actually go out and find a better competing deal.
But this is exactly what Jeffrey Smith — a co-founder and the chief executive and chief investment officer of New York activist hedge fund firm Starboard Value — has apparently done. On May 29 the food processing company Smithfield Foods agreed to be acquired by Hong Kong–based holding company Shuanghui International Holdings for $34 a share. In typical activist manner, Starboard fired off a letter to Smithfield’s board of directors urging the company to seek a higher price. Smith claimed that the sum-of-the-parts value of Smithfield’s operating divisions — which include hog production, international and pork — far exceeds the current price of the stock. Starboard called for a separation of these businesses, which it claimed were worth between $44 and $55 per share. Starboard also insisted that there are numerous interested parties for each of the operating divisions.
At the time, at least one commentator accused Starboard of engaging in “Excel spreadsheet activism,” with a strategy laden with too many assumptions to be taken very seriously. However, Smith now seems ready to prove he is right. Ahead of a scheduled September 24 special meeting to approve the deal, the hedge fund manager says he is opposing it because he has found some interested parties willing to buy the various pieces of the company.
“We have received non-binding written indications of interest from third parties, based on publicly available information, for each of Smithfield’s assets, which in the aggregate imply a total value for Smithfield at a price substantially in excess of the $34 cash deal with Shuanghui,” Smith stated in a letter to Smithfield shareholders that was made public on Tuesday.
Starboard reported in a regulatory filing that it owns nearly eight million shares of Smithfield, or a 5.7 percent stake. The hedge fund’s stake includes a little more than six million shares underlying call options.
Smith is urging the company to put off the scheduled meeting for about two months, to no later than November 29, the latest date the deal could be approved based on the negotiated merger agreement. Under the deal with Shuanghui, Smithfield’s board can consider competing bids only before the acquisition is approved. “We are seeking additional time, if needed, to submit an alternative proposal to the board at a substantially higher value than the proposed merger,” Smith stated.
He did not spell out in his letter which firms or investment groups are interested in the various parts of Smithfield. He also did not say what price Smithfield would ultimately receive. He just said he is working with “interested third parties” as quickly as possible to put together an alternative proposal “as expeditiously as possible.”
Starboard is not the only hedge fund that has a strong interest in Smithfield. We earlier reported that in the second quarter, Smithfield was one of 15 stocks ranked among the 50 stocks that appear most frequently among the top ten holdings of fundamentally driven hedge fund portfolios that were not on the list at the end of the first quarter. The hedge funds with the largest number of actual shares are San Francisco–based Farallon Capital Management and New York–based Paulson & Co., the third- and fourth-largest shareholders, respectively, with about five million shares apiece.
The stock rose to about $33.73 on Tuesday.
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