WASHINGTON, April 25, 2013 – Splitting Smithfield Foods into three independent companies by “divesting underperforming and highly volatile hog production and select European assets” and taking other steps would boost its share price to $40 within three years, Continental Grain said in a detailed presentation [here] filed today with the Securities and Exchange Commission. Smithfield stock has been trading around $26 this week.
The filing by Continental Grain, one of the largest shareholders of Smithfield Foods with 6 percent of its stock, elaborates on its proposal to the pork producer-processor. Smithfield subsequently told investors about disadvantages of the proposal (Agri-Pulse, April 10). Continental says that it considers Smithfield’s April 1 investor presentation, in response to its March 7 letter to the board, “inadequate and a continuation of an unacceptable status quo.”
In addition to breaking up the company and using the proceeds to buy back shares, Continental recommends that Smithfield restructure its packaged meats business “to achieve profitability levels in line with peers,” add three new directors with background and experience that “reflect the current business” and align management compensation to shareholder returns.
Management salaries now are “out of line with performance and peers,” Continental alleged. “Since Larry Pope took over as CEO in September 2006, he has been paid a total of $58.7 million and senior management has been compensated a total of $172 million,” it said, an amount 37 percent higher than the CEOs of its main competitors – Hormel Foods, Tyson Foods and Hillshire Brands. CEOs of all three competitors “created significant shareholder value since they became CEOs” whereas Smithfield’s had edged up only slightly in six years. Smithfield also trails them in a number metrics, Continental said, notably revenue per employee: Smithfield earned $285, Tyson $295, Hillshire $423, Hormel $432 and Seaboard Foods $548.
Continental also questioned the independence or qualifications of many Smithfield directors, saying David Nelson had “no operating experience” in a career as an analyst. Because he works for Rabobank, a major lender to Smithfield, his independence is questionable. Wendell Murphy’s “extensive business relationships with the company” make him “not independent.” Continental also questioned the agribusiness credentials of directors Carl Crawford, John Schwieters, Margaret Lewis and Frank Royal and the independence of former Sen. Paul Trible, president of Christopher Newport University, which has received more than $10 million in donations from Smithfield. The only director Continental did not question is Richard Crowder, a Virginia Tech professor and former under secretary of agriculture and USTR agricultural trade negotiator.
“We recognize that the international business has been profitable as of late,” Continental asked, but questioned whether it was positioned to create shareholder value. It had a “disparate assortment of assets concentrated in Eastern Europe” but also in the United Kingdom and Mexico, it said. Smithfield’s Campofrio unit, the largest processed meat business in Spain, “has consistently destroyed shareholder value over the past five years,” Continental said. There was limited overlap between the European units “and no obvious synergies” with the U.S. business.
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