Continental Grain Co., one of largest shareholders of Smithfield Foods, Inc., has sent a letter to the company as well as the U.S. Securities and Exchange Commission urging Smithfield to split into three independent companies in an effort to boost shareholder value.
Continental Grain recommended the company split into separate hog production, fresh pork and packaged meats, and international businesses in order to compete more effectively with Tyson, Hormel and others.
“Since the current management took over on Aug. 31, 2006, and through March 1, 2013, Smithfield stock has declined by 26% while, including dividends, Tyson stock returned +70% and Hormel returned +131% — a shocking divergence in shareholder return among industry competitors,” Continental Grain said in the letter. “During this time, Smithfield has paid no cash dividends while Tyson has cumulatively paid $429 million and Hormel has paid $728 million.”
Continental Grain said Smithfield’s hog production segment has yielded negative returns in three of the last five fiscal years and uses significant amounts of capital, and there has been more than $1 billion invested in the European business with very little return until recently. They said Smithfield has talked a lot about China, but accomplished little to date despite 50% of the world’s pork being produced and consumed in that market. Continental Grain also said the U.S. processing and packaged meats business may be a very valuable piece of the company if run by experienced packaged food and consumer product executives.
Yet as recently as December, Larry Pope, president and chief executive officer of Smithfield, addressed the issue of splitting and dismissed it.
“I’ve looked at that idea,” Mr. Pope said in response to an analyst’s question regarding a spin-off. “It’s complex and not easy to do. And you’d be surprised how integrated this business is, particularly the pieces (and) how they tie together.”
But at the same time Mr. Pope described Smithfield Foods as “essentially two companies” made up of a commodity-based live production company and a fresh and processed consumer-packaged meats company.
On March 8, Smithfield acknowledged receipt of the letter and said the board of directors along with its financial and legal advisers “will review it in due course.”
“Six years is sufficient time for a management team to provide real results to its shareholders,” Continental Grain said in its letter. “We haven’t seen those results and believe a new strategy with some new individuals is warranted to bring the company back to the high returns that Smithfield has produced in the past and is capable of producing going forward. Smithfield’s valuation should reflect its full potential. We welcome the opportunity to meet with Smithfield’s board and management to discuss in more detail the ideas that we have presented.”
