WH Group Serves Up Smithfield Spinoff To Support Overseas Expansion

Key Takeaways:

• WH Group plans to list its Smithfield pork subsidiary as early as this year in a U.S. IPO that could raise $1 billion or more
• Potential Chinese anti-dumping tariffs against European pork could throw a spanner into the company’s recent European expansion 

By Lee Shih Ta

After months of rumors, leading Chinese meat producer WH Group Ltd. (OTC:WHGLY)(OTC:WHGRF) is finally serving up some new bacon for investors by confirming plans to spin off its Smithfield Foods subsidiary for a separate listing in New York. The IPO is expected to raise at least $1 billion by re-listing Smithfield on the New York Stock Exchange or the Nasdaq as soon as this year, according to a WH Group announcement earlier this month. 

WH was considering such a move for quite a while, and rumors started to circulate as early as last October. Investors gobbled up the story by bidding up WH Group shares 5.2%, their biggest daily increase since April, after Bloomberg reported on the plan several days before the official announcement. The rally continued after the official news release, though a 7% jump eventually fizzled and the stock ended up by a slight 0.2% at HK$5.23 for the day. 

WH Group made headlines in 2013 when it acquired Smithfield for $4.7 billion, as a new crop of up-and-coming Chinese companies were starting to go global with major overseas acquisitions. Based in the U.S. state of Virginia, Smithfield was the biggest pork producer in the U.S. at that time, slaughtering about 30 million hogs a year. Smithfield de-listed from the U.S. after the deal, and a year later WH Group, then known as Shuanghui, listed in Hong Kong.

WH Group also controls leading Chinese pork producer Shuanghui Development (000895.SZ), making it the world’s largest pork company. WH is currently valued at HK$68.6 billion ($8.8 billion), while the Shenzhen-listed Shuanghui is worth an even larger 82.6 billion yuan ($11.3 billion). A successful new listing for Smithfield would make the U.S. producer WH Group’s third listed company, serving up investment options in three major global markets.

The U.S. and Mexico became WH Group’s largest markets after the acquisition, but they weren’t as profitable as the company’s home China market. WH Group’s latest annual report shows its revenue fell 6.8% year-on-year to $26.24 billion in 2023, with China accounting for about a third of the total and the U.S. and Mexico combining for about 54%. But the situation was reversed in terms of profits, with China supplying 64% of the company’s operating profit while the U.S. and Mexico provided only 22.4%. The remaining operating profit and revenue came from Europe.

Global Business Overhaul

Falling pork prices and rising breeding costs have been the two main drags on WH Group’s U.S. business, which lost $62 million in this year’s first quarter. Inability to turn a profit in the American market is currently the company’s biggest challenge overseas. Accordingly, the spinoff and listing of Smithfield will provide a much-needed cash infusion for the company’s U.S. business. It will also open an important new financing channel to support development of WH Group’s business in other overseas markets.

The company has been working hard to shore up its overseas business these past two years. It closed processing facilities and downsized its pig farming business in California in May 2022, and restructured its pig farming operations in Missouri and Utah. Last month it also closed a ham boning plant in Iowa.

WH Group also sold its interest in Saratoga, a specialty food business, and Norson, a Mexican integrated hog producer, and has expanded its European business through acquisitions. In February last year, it completed its acquisition of Romanian meat producer Goodies. Last November, Smithfield also acquired 50.1% of Spanish meat producer Argal Group.

Vulnerable To China Tariffs 

Having expanded its European base, WH Group is suddenly looking exposed to growing trade tensions between China and Europe.

Following the EU’s recent rollout of anti-dumping tariffs on Chinese electric vehicles (EVs), China’s Commerce Ministry has launched a retaliatory anti-subsidy investigation into EU pork products, which could lead to China’s own anti-dumping tariffs. China previously took similar steps against U.S. pork products, leveling 25% tariffs on them after Washington imposed tariffs on Chinese steel and aluminum products. 

China is the world’s largest pork market, accounting for about half of global consumption. WH Group has been purchasing pork from Smithfield since 2014 through Shuanghui Development, with total purchases worth about 39.9 billion yuan between 2014 and 2021. But imports have declined in recent years as tariffs and other factors have made imported products less competitive.

WH Group’s forecast price-to-earnings (P/E) ratio currently stands at 8.6 times, well below the 24.6 times for Chinese peer Muyuan Foods (002714.SZ) and 16 times for U.S. chicken giant Tyson Foods (NYSE:TSN), reflecting investor concerns about the ongoing losses at Smithfield. 

CCB International believes the spinoff will unlock value in Smithfield and has raised its target price for WH Group to HK$6.50 from HK$6, maintaining an “outperform” rating. Recovering pork prices may perk up investor interest in the meat products industry, though global uncertainties could continue to weigh on WH Group’s stock. With its Smithfield spinoff already baked into its price, the company will need to show strong results in its U.S. overhaul and European expansion to keep investors coming back for more of its shares.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.