The merger of the Chinese and North American business behemoths will create opportunities in Europe for Cranswick and others, said Shore Capital’s Darren Shirley.
“We believe that Shuanghui’s purchase of Smithfield has strategic significance, noting as we do Cranswick’s leading market position, strong balance sheet, excellent prospects and fabulously invested facilities in the UK in particular.
‘Growing strategic issue’
The merger of the Chinese and North American giants had key significance for European industry, “where guaranteeing high-quality supply is also a growing strategic issue”, said Shirley.
Securing supply is of growing importance for processors and retailers, following the introduction of welfare rules across the EU, rules that were introduced more than a decade ago in the UK.
“We believe that this view is supported by Cranswick’s re-entry into pig production through the acquisition of East Anglia Pigs and Tesco UK’s announcement in February 2013 that it is seeking full local supply of fresh pork.”
Meanwhile, the rationalised UK pork industry left current players well positioned, said Shirley. “With Vion's rationalisation and exit from the UK market, the remaining leading players such as Cranswick and Tulip appear to be increasingly well positioned from a strategic context. While the consumer economy remains challenging, pork has strong value credentials, while value added initiatives continue to enhance the reputation and demand credentials of the protein.”
Shuanghui has agreed $34/share in cash for Smithfield, which values the equity at $4.7bn. That represented an enterprise value of $7.1bn in cash for the American business.
Under the terms of the deal, Smithfield was thought to have 30 days to continue talks with other bidders, thought to be Thailand’s CP Foods and Brazil’s JBS.
Shore Capital thought the rationale for the acquisition to be more about securing high-quality supply in the Chinese market, rather than extracting buying and operating synergies. Shuanghui intended to retain all 46,000 Smithfield employees on their present terms and conditions, all of its 460 farms and processing facilities and its senior management team.
“As such, we believe Shuanghui is seeking to utilise Smithfield’s higher welfare production and it own significant distribution capabilities to secure a stronger position in the massive Chinese pig-meat market, particularly with a rapidly growing middle class,” said Shirley.
Since Shore Capital acted as broker to Cranswick, it offered no recommendation on the businesses’ stock.