RPT-BREAKINGVIEWS-Smithfield IPO gets at meat of the M&A matter

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Jennifer Saba

NEW YORK, Jan 27 (Reuters Breakingviews) - A pork deal somehow failed to bring home the bacon, but it’s set to sizzle now. China’s WH Group 0288.HK, which bought Smithfield Foods more than a decade ago is on the verge of taking the U.S. deli meat and hot-dog maker public again. The spinoff mainly illustrates how so many buyers lard themselves with foolish deals.

In what was the largest acquisition of a U.S. company by a Chinese one, WH Group paid $7.1 billion, including debt, for Smithfield in 2013. The idea was to export cheaper pork and pig-farming expertise to the People’s Republic. The reality, as it so often does, turned out differently.

Costly tariffs, an African swine flu that wiped out a large swath of China’s hogs in 2019 and WH Group’s stagnant operating margin undercut much of the transaction’s rationale. Since it was bought, Smithfield – led by CEO Shane Smith since 2021 - has improved the operating margin in the packaged meats division, but overall revenue has only increased 11% compared to 41% for peer Tyson Foods TSN.N from 2013 until 2023.

Smithfield’s parent company trades at less than 5 times its projected EBITDA for this year, according to Visible Alpha, obscuring the U.S. subsidiary’s value on the Hong Kong bourse. It makes the separation planned for Tuesday look sensible. At the midpoint of Smithfield’s mooted $23 to $27 price range, the equity would be worth about $10 billion. The enterprise, including debt, at $11 billion, implies a valuation multiple of 8 times estimated 2024 EBITDA, on par with Kraft Heinz KHC.O and Tyson Foods, and roughly the same as what WH Group paid.

With just a 50% uplift in the 11 years since WH Group’s acquisition, it’s hard to justify all the capital and other resources deployed to do the deal. China’s Dalian Wanda Group flexed similar ambition when it bought a controlling stake in U.S. theater chain AMC in 2012 only to later retreat. Swiss building materials company Holcim HOLN.S also is aiming to attract more value for its North American division, built in part from acquisitions, by hiving it off as a separately traded company. Cross-border M&A in particular is fraught for so many reasons, it’s a wonder acquisitive CEOs keep putting themselves through the grinder.

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CONTEXT NEWS

Smithfield Foods, the U.S. division of Chinese pork producer WH Group, priced its shares between $23 and $27 apiece ahead of a planned initial public offering on Jan. 28. At the midpoint of the range, the company would be worth $11 billion, including net debt.

WH Group bought the company in 2013 in a deal worth $7.1 billion, including net debt.