COFCO invests in Smithfield foods

Smithfield Foods' capital-raising plans are making investors nervous as grain prices increasingly crimp food companies' margins. Shares slipped more than 12.0% on Tuesday despite news that the China's largest agricultural trading and processing company, COFCO, agreed to invest in the Smithfield, Va.-based company.

Shares of Smithfield Foods fell to a new five-year low during Tuesday's session, down 15.2% at $16.85. At Tuesday's closing bell, the company was down by $2.43, or 12.2% $17.45. On Monday, Smithfield said it would sell its main European subsidiary, Groupe Smithfield Holdings SL, to a Spanish meat-processing company and also offered $350.0 million in convertible senior notes. The company said it plans to use the proceeds to fund planned convertible note hedge and warrant transactions and to pay down debt.

Analysts say the deals show how challenging it is for agricultural companies to keep up with the rising working capital costs as grain prices skyrocket and now that debt-financed credit is more difficult to obtain as a result of the global credit crunch.

By agreeing to buy a 4.95% stake in the world's largest hog breeder and pork processor, Smithfield Foods of the United States, China's largest food importer and exporter, the COFCO Group, is signaling its intention to upgrade conditions for the hogs it plans to raise in a newly launched green initiative. The fully state-owned COFCO Group, whose full name is China National Oils, Foodstuffs and Cereals Corp., will purchase 7 million Smithfield shares, whose value will be based on the closing stock price on the pricing date of a concurrent offering by Smithfield of $350 million worth of convertible senior notes.

Smithfield late last year started selling pork to China as part of China's policy of expanding imports from the United States. Smithfield's announcement last August that it would begin exporting to China, together with a confirmation of the same in January by rival Tyson Foods (nyse: TSN - news - people ), caused pork prices to rise in the United States.

The Chinese people have been altering their dietary habits to reflect the country's newfound economic prosperity. As demand for animal protein grows, agricultural producers are turning their attention toward the country's pig population of some 500 million, looking for best practices even as swine raising is intensified.

"China is experiencing rapid growth in pork consumption and consumes more pork than the rest of the world combined. COFCO has introduced Smithfield to many opportunities in China and we look forward to continue working together," said Smithfield President Larry Pope.

In announcing the latest deal, Smithfield said that COFCO's investment is passive in nature and that the purchase agreement contains standstill provisions. COFCO Chairman Gaoning Ning will be nominated to serve as a director at Smithfield's 2008 annual shareholders' meeting. A COFCO spokeswoman, Zhang Xin Yue, said that the company does not intend to raise its stake in Smithfield; the purpose of the investment is to enlist Smithfield's expertise in growing "healthy hogs" on a commercial scale.

China is a major producer of pork but relies on small farmers to raise pigs. COFCO went into pig farming in October 2002, setting up a small operation in central Hubei province that maintains a breeding stock of 20,000 animals and raises half a million hogs commercially, under contract with local farmers. Its products have won the government's green certification. Still, more systematized commercialization and better hygienic standards are called for: pork costs have risen sharply in China, in part because an outbreak of the mysterious blue ear hog disease is estimated to have wiped out as much as 20% of China's pig population.

Under its commercialization initiative, called the Ecologically Healthy Live Hogs Breeding Program, COFCO has earmarked a total of 12 billion yuan ($1.74 billion) this year for investment to improve the conditions under which hogs are raised, affording 1.5 square meters (16.15 square feet) for each animal. The project also looks to secure adequate water and electricity supplies and will be deploy recycling technology.

The goal is to make COFCO the largest pig farmer in China, with a national market share of between 2% and 3% in three to five years' time. That would translate into annual production about 10 million and 15 million hogs, raised in accordance with standards and practices prevailing in the United States.

In a separate development, Smithfield Foods announced Monday that it would sell its principal European subsidiary, Groupe Smithfield Holdings, to Spain’s Campofrio Alimentacion, a meat processor in which Smithfield already holds a substantial stake. Smithfield will end up with 36% of the combined company, which will have annual sales of $3 billion and a presence in Romania and Russia, in addition to the Iberian and Benelux countries and France. The sale is subject to Spanish regulators waiving a requirement that a stakeholder with more than 30% of a company launch a full takeover bid.

(Reuters & AP)

No comments: