I guess when you're negotiating a merger you always think you're being clever but when it's reduced to the affectless blow-by-blow in a merger proxy it can sound a little silly:
On April 19, 2013, Parent [Shuanghui International] sent a revised non-binding written proposal to Smithfield increasing the price per share Parent was willing to pay to $33.50 per share in cash [from $33.00]. Contemporaneously with the delivery of this written proposal, representatives of Parent’s advisors communicated to representatives of Smithfield’s advisors that, while Parent had decided to increase its price by $0.50, the impact of the expected fourth quarter financial results was negatively viewed by Parent. In particular, Parent’s advisors noted that a transaction at this price would be more challenging from a financing perspective and that the expected weakness in Smithfield’s fourth quarter results had significantly limited Parent’s willingness to increase its proposed price and, in fact, that Parent even considered reducing the original proposed price of $33.00 per share in cash.
Oh? "We raised our bid, but JUST SO YOU KNOW, we wanted to lower it, so don't push us." Obviously they ended up at $34.
Anyway, from the proxy that Smithfield filed yesterday, it sounds like their merger process was pretty thorough; they got two bids from mysterious Company A and Company B, and considered various break-up/spinoff/what-have-you plans as well, before settling on Shuanghui as the highest and most certain offer.1 Obviously they did not consider every permutation of selling the company for parts, and in particular Starboard Value's idea of splitting it into three parts doesn't seem to have come up. So there can be plenty of fighting over that, I dunno, whatever.
Also possibly fight-worthy is that Barclays, Smithfield's financial advisor, got a DCF value for the company of $35.37 to $42.87 using management's financial projections, which is a little uncomfortable as it suggests that Shuanghui is underpaying. It also sort of supports Starboard's analysis that Smithfield's assets are worth more than the market, and Shuanghui, are giving them credit for. This is passed over rather briefly, and dealt with a bit along the Dell lines of "well no one should believe management anyway."2 Like I've said: more companies should go through the exercise of trying to convince their shareholders to sell. It focuses the mind.
One other fun tidbit here is that Goldman had locked up the business of selling Smithfield in 2011, but got kicked out of the deal because Goldman's private equity funds are an investor in Shuanghui. From the proxy:
Smithfield had retained a different financial advisor [Goldman] since 2011 to advise it with respect to shareholder activism matters. The engagement letter with such financial advisor in connection with such retention also provided that such financial advisor would advise Smithfield in connection with a potential sale of Smithfield. ...
Smithfield became aware that the financial advisor that had been retained with regard to shareholder activism issues, through one of its affiliates, had a relationship with Parent. Due to this relationship with Parent, Smithfield concluded (with the concurrence of such financial advisor) that it would not be appropriate for such financial advisor to advise Smithfield in respect of Parent’s proposal or any alternative proposal. Such financial advisor remained engaged with respect to matters solely related to the Continental Grain letter and similar shareholder activism.
So they hired Barclays, "based on Barclays’ reputation and experience as an investment banking firm generally and its knowledge of the packaged meats sector in particular." Do you think packaged meats bankers have an inferiority complex directed at tech bankers?3
But I digress. A few things are worth noting about Goldman's missed opportunity. One: "(with the concurrence of such financial advisor)." There was a time, one suspects, when Goldman would have fought hard to keep its contractually locked up merger advisory role, and patiently explained that conflicts are no big deal and make everyone stronger. That time was "all times up to the El Paso decision." That's a chastened Goldman Sachs, there in that parenthesis.4
Two: does no one else find it weird that activism advisory letters lock up sale-of-the-company business? The process is roughly:
- Activist sends letter saying company should sell itself, in bits or otherwise;
- Company hires investment bank to make activist go away;
- Company agrees to pay investment bank giant gob of money if company sells itself.
That seems like its own conflict, or at least incentive-skewing, no? It's just fortuitous that here it was canceled out by another, bigger, conflict.
1.Company B's first offer was $34.00, but they said they couldn't execute until June 13; Smithfield used this to leverage Shuanghui to $34.00, but because Shuanghui on May 24 "made it clear that if the parties did not reach agreement and sign the merger agreement by 6:00 pm Eastern Time on May 28, 2013, Parent’s offer would be withdrawn," Smithfield agreed to kick negotiations with Company B to a go-shop period (with a $75mm termination fee payable to Shuanghui). You could find that a little abrupt; merger proxies are littered with deadlines that quietly pass without anyone making a fuss about them, but of course we weren't there, maybe Smithfield looked into Shuanghui's eyes and saw that no, really, they'd bail if there was no deal by May 28.
2.Here's how Barclays puts it:
In order to estimate the present value of Smithfield common stock, Barclays performed three separate discounted cash flow analyses of Smithfield based on three separate scenarios: (i) the EBITDA projections of Smithfield’s management, (ii) a sensitivity selected by Smithfield’s management of 100 basis points discount to the EBITDA margin assumed in the projections of Smithfield’s management (“Management Sensitivity 1”) and (iii) a sensitivity selected by Smithfield’s management of 200 basis points discount to the EBITDA margin assumed in the projections of Smithfield’s management (“Management Sensitivity 2” or, together with Management Sensitivity 1, the “Sensitivity Analyses”). Barclays discussed the Sensitivity Analyses with the management of Smithfield and Smithfield agreed with the appropriateness of the use of such sensitivity analyses as part of the performance of Barclays’ analysis. Smithfield’s management indicated to Barclays and the Smithfield Board that, particularly in light of Smithfield’s performance in the fourth fiscal quarter, it would be appropriate to focus on a discount of at least 100 basis points to the EBITDA margin assumed in the management projections for purposes of evaluating Barclays’ analysis. ...
The discounted cash flow analysis based on (a) the management projection case implied an equity value range for Smithfield of $35.37 to $42.87 per share; (b) the Management Sensitivity 1 case implied an equity value range for Smithfield of $30.59 to $35.50 per share; and (c) the Management Sensitivity 2 case implied an equity value range for Smithfield of $24.16 to $29.03 per share. Barclays noted that on the basis of the discounted cash flow analysis, the transaction consideration of $34.00 per share was: (a) below the range of implied values per share calculated using the management projection case; (b) within the range of implied values per share calculated using the Management Sensitivity 1 case; and (c) above the range of implied values per share calculated using the Management Sensitivity 2 case.
"Smithfield's management indicated ... that ... it would be appropriate to ... focus on a discount of at least 100 basis points to ... the management projections." The EBITDA margins in the projections range from 5.7% to 9.4%. Smithfield's management told its bankers and board: we project that our projected margins are like 10-15% too high, maybe more. So: why not just project the margins that you think are the right margins?
3.The answer is yes. Counterintuitively, though, the best bankers, from a naming perspective, are the people who cover electric utilities. "Managing Director and Head of Power Banking": great title. "Oh, you're a tech banker? I'm a POWER BANKER."
4.Related: did they get any compensation for passing on the locked up business? Besides, like, remaining engaged as an activism advisor even as Smithfield was negotiating a sale of the company, which seems a little unnecessary.