Smithfield Foods is collecting ammunition in Canada to fire in battle in the United States, analysts say.
The company is selling its Canadian subsidiary Schneider Corp. because it wants to beat a rival’s bid for a smaller U.S. company.
“Smithfield needs the cash in order to continue to bid for Farmland (Foods),” said University of Missouri meat industry analyst Ron Plain.
“I think they’d rather own Farmland’s operations here in the States than continue to own Schneider. They probably didn’t have the financial wherewithal to do both.”
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Farmland Foods is a pig slaughterer at the centre of a takeover battle between Smithfield Foods and Cargill Inc.
Smithfield made an early bid to buy Farmland for $363.5 million US in July, but Cargill has now bid $385 million.
Smithfield had spoken of issuing equity shares to finance the takeover, but its proposed sale of Schneider will leave it with about $300 million in cash after Schneider’s debt is paid off.
Most analysts expect Smithfield to make another bid for Farmland now that it has signed a prospective deal for Schneider.
Plain said Maple Leaf should benefit from taking over Schneider.
“Maple Leaf should be a large firm in a strong position to stay competitive with U.S. packers,” said Plain.
Maple Leaf is planning to finance the deal with debt, but then sell shares to cover the investment.
The company has an agreement with the Ontario Teachers Pension Plan to sell it up to $150 million worth of shares at a six percent discount, but it does not want to use that option.
“It’s a safety net, if we wish … only done if we need,” said Scott McCain, president and chief operating officer of Maple Leaf’s agribusiness division.
