(SFD) Smithfield to Explore Packaged Meat

Following the pull out from the acquisition deal of Spain’s Campofrio Food Group SA in June, Smithfield Foods Inc. (SFD) is now looking for potential opportunities in packaged-meats such as in smoked ham, bacon and frozen meatballs in an effort to enhance its brand value in the emerging markets.

Currently, Smithfield is eyeing on Sara Lee Corp. (SLE), which is spinning off its beverage business to focus on meat. As an alternative, the company might get interested in China’s People’s Food Holdings Ltd., the world’s biggest consumer of pork and who has considerable amount of net cash and gets all its sales in China.

Sara Lee

Smithfield was always interested in the retail meats division of Sara Lee. In August 2006, Smithfield bagged Sara Lee’s European meats arm for $614 million, including net debt. At present, Sara Lee, postsplit of its beverage division, can become one of the options for Smithfield.

Sara Lee’s North American retail meats business generated $2.9 billion in sales in the past one year and had an operating margin of 9.7%, according to reliable sources; wherein Smithfield could generate only 7.6 cents in operating income per dollar of sales.

If the deal consummates, Sara Lee’s meats unit would increase sales at Smithfield’s packaged meats business by about 50%, according to sources. Further, this will reinforce higher margin activities.

People’s Food

One more option with Smithfield is the acquisition of Linyi-based People’s Food, a meat processor in China, which is valued at $721 million.

Over the past three years, People’s Food has increased sales by 54% and has generated $246 million in net cash, according to reliable sources. Further, it has generated about 41% of its sales from processed meats, and the remaining from fresh and frozen pork and poultry.

According to the U.S. Department of Agriculture, pork accounts for half the world’s consumption of the meat. The demand for pork surpasses the supply and thus the price of pork in China has remained at their highest level since April 2008 due to the shortage.

This might excite Smithfield to acquire People’s Food as the Chinese consume more pork per capita than anyone in the world.

Other Alternative

Tyson Foods Inc. (TSN) might become one alternative for Smithfield based on its operations, but the former is the biggest U.S. meat processor and its size would make it difficult for Smithfield to pull off without penalizing its own shareholders.

Smithfield has limited cash of $374.7 million and debt of $2.1 million as against the Tyson’s market value of $3.6 billion, which indicated that the acquisition of Tyson would have to be financed through equity or debt.

Smithfield posted positive earnings of $521 million at the end of April, 2011, after facing two years of losses. However, Smithfield projects rising expenses going ahead , such as those to raise, feed and slaughter hogs, as well as those to produce meat products. Therefore, the company expects its earnings to fall by 19% for fiscal 2011.

Additionally, Smithfield’s debt-to-equity ratio, which measures the debt of the company relative to its common shareholder equity, is very high in comparison to its peers. Smithfield’s debt-to-equity ratio is 60%, surpassing the ratio of 44% of Tyson.

Smithfield is thus keen on looking at companies under $1 billion in value as it believes that small acquisitions in faster growing economies would help the company to boost the returns and the debt-equity ratio. In addition, Smithfield might also consider buying smaller companies with related product lines that have a larger proportion of sales outside U.S.

SMITHFIELD FOOD (SFD): Free Stock Analysis Report

SARA LEE (SLE): Free Stock Analysis Report

TYSON FOODS A (TSN): Free Stock Analysis Report

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