VIC Special: Should Smithfield Be Sold Whole or in Parts?

That's the question from provocative money manager Jeff Smith, head of Starboard Value - who by the way will be presenting at the September Value Investing Congress. With a 5.7% stake, Starboard is the largest shareholder in Smithfield Foods (SFD), the world's top hog farmer and pork producer. The investment firm worries that Smithfield is rushing to sell itself to a single buyer, when breaking up the company could be more profitable for stockholders.

Of course, Smithfield agreed in late May to be bought by Hong Kong's Shuanghui International Holdings Ltd., for $4.7 billion in cash. The deal is making headlines and attracting Congressional scrutiny because-- if it closes-- it would be the largest purchase of a U.S. company by a Chinese firm.

In a June preliminary proxy filing, Smithfield was against dismantling the company. In that document, Smithfield said its board explored the idea and “determined that at the present time it was not in the best interests of the Smithfield shareholders to pursue a restructuring or other breakup.”

Jeff Smith isn't convinced, so he's pressing the matter.

Starboard sent a 16-page letter to Smithfield's board in June, stating the case for taking apart the pork giant. That communication also disclosed the size of Starboard's holdings in Smithfield. Notably, though, Starboard didn't reject a marriage with Shuanghui International.

As Jeff Smith explained to CNBC, "we're not necessarily against the transaction. We just believe that the company didn't necessarily look at the alternatives of selling the company in pieces."

Shuanghui has offered $34-a-share for all of Smithfield. That's an attractive 31% premium on Smithfield's closing stock price May 28th, one day before the merger was announced. Starboard acknowledges that Shuanghui's bid "goes a long way towards unlocking the intrinsic value of the company for shareholders." However, Starboard contends that Smithfield could get from $44 to $55 per share if sold in three blocs: U.S. pork processing; hog farming and international operations.

Starboard estimates the hog unit's pretax value at $1.9 billion to $2.3 billion; the international operations between $1.3 billion and $1.5 billion; and the pork division at $6.2 billion to $7.9 billion.

Starboard isn't the first big Smithfield investor to feel this way. In an April SEC filing, Continental Grain Company called for Smithfield's breakup. Continental Grain had been a major Smithfield stockholder since 2006. But after the merger agreement was disclosed, Continental Grain decided to liquidate its 6% stake.

While the union with Shuanghui is pending, Smithfield is barred from seeking better offers. However, there is a period for Smithfield to field unsolicited higher bids. With that window open, Starboard Value is working to identify buyers for Smithfield's segments.

Smithfield hasn't said which breakup possibilities its board explored, or why those were ruled out. That lack of information has troubled investors like Jeff Smith.

For instance, there are concerns that the deal is unfairly influenced by tens of millions of dollars in retention payments for Smithfield executives. The senior managers only get that money if Smithfield goes to Shuanghui in one piece. Thus the people operating Smithfield have powerful incentive to keep the company intact.

Regardless of the outcome, observers know Jeff Smith will push hard to maximize returns on Starboard's holdings. He does that with all investments.

In 2012, for example, Jeff Smith's successful lobbying at AOL (AOL) produced a $1.1 billion sale of patents. Those proceeds were returned to Starboard and other investors through a stock buyback and special dividend. Then this year, at Starboard's urging, Office Depot Inc. (ODP) sold its 50% stake in Office Depot de Mexico SA to its joint-venture partner.

At its core, the Smithfield debate is about the pros and cons of vertical integration and Jeff Smith is at the forefront of those discussions.

Jeff Smith will be sharing his insights and his latest investment idea in September at the 9th New York Annual Value Investing Congress, the event CNBC dubbed “The Superbowl of Value Investing.” The event takes place September 16 & 17, 2013 at Jazz at Lincoln Center’s Frederick P. Rose Hall and some of the world’s most successful investors are slated to present, including Jeff Ubben, Mick McGuire, and Alex Roepers, to name a few.

The early bird price expires on July 30th – to take advantage of significant savings, including a special SumZero discount, go to http://www.valueinvestingcongress.com/sumzero1 and use discount code N13SZ2.