Well, the big just officially got bigger, but most pork industry watchers are not surprised. While Smithfield seems like a huge force in the pork industry — and it is — in terms of U.S. businesses dominating a share if its market, it really is not.
Still, in an industry historically dominated by several small entities, Smithfield is a Goliath that is miles ahead of its No. 2 competitor.
In the end, it illustrates that the U.S. Justice Department applied traditional antitrust principles in considering the merger. Some thought that a separate set of standards should apply to the food industry.
The Premium Standard Farms inclusion will move Smithfield's share of the U.S. packing industry from about 30 percent to around 35 percent. It will increase it's live production sector by about one-third, notes Glenn Grimes, University of Missouri agricultural economist.
"It would have been more surprising if it didn't go through," Jim Minert, professor of agricultural economics at Kansas State University, told Meatingplace.com.
"Smithfield's market share still is not large enough that you would typically see antitrust action taken."
However, others note, "It's surprising that it was approved in its entirety," says Timothy Ramey, an analyst with D.A. Davidson & Co. He points out that some industry watchers thought Smithfield would have to sell one of its packing plants in the southeast. Already the No. 1 U.S. pork producer and processor, this latest move will strengthen Smithfield's position in the market-- especially in the southeast.
The short-term impact is expected to be minimal, says Minert. "Longer term, it depends how Smithfield manages this combined company."
Grimes agrees, noting that the future growth of integrators in the pork industry naturally depends on their profitability, which has been somewhat slow to materialize. "If they prove successful, there will be more integration in the future," he notes.
Now that the Justice Department has given its blessings, Smithfield Foods can proceed with its purchase of PSF, and Smithfield officials have outlined the details.
In accordance with the buyout, each PSF share has been converted into 0.678 Smithfield shares plus $1.25 in cash. PSF shareholders will receive a combined stock and cash value of $22.13 per PSF share (based on last Friday's closing price of Smithfield shares on the New York Stock Exchange, which was $30.79.) In all, the PSF purchase price was about $800 million, including the $125 million in PSF's debt that Smithfield will assume.
So, will Smithfield continue to grow? The easy money is to bet on "yes". The company may have satisfied its pork industry appetite for a while, but there's more room to expand the beef sector.