Food firm China's biggest buy in US

Updated: 2013-05-30 11:48

By Michael Barris in New York and Joseph Boris in Washington (China Daily)

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In what would be the biggest takeover of a US company by a Chinese buyer, Shuanghui International Holdings Ltd has agreed to pay $4.72 billion to acquire Smithfield Foods Inc, the world's leading pork producer, to meet growing demand for US-made pork.

The transaction, which also includes $2.38 billion in assumed debt, is China's largest cross-border deal since CNOOC Ltd last year paid $15.1 billion for Canadian oil and gas producer Nexen Ltd. It faces regulatory scrutiny because it would bring a major US business under foreign control.

The announcement on Wednesday comes a week before the June 7-8 meeting in Southern California between US President Barack Obama and Chinese President Xi Jinping. It also comes at a time when food safety, along with environmental pollution, is a chronic problem in China, prompting the central government to crack down on some food producers. The country is the world's largest consumer of pork.

In a conference call with analysts after the deal was announced, Smithfield CEO C. Larry Pope characterized the transaction as "exporting America to the world" rather than as part of a strategy to import Chinese pork into the United States. The companies had been in discussions for four years before reaching agreement, he said.

"We saw the opportunity," Pope said, but "pricing has always been an issue".

Shareholders have long been critical of Smithfield's stock price with Pope in charge. Terms of the deal prompted at least one lawsuit by shareholders who claim the company board breached its fiduciary responsibility by accepting an offer that was too low.

In March, Continental Grain Co, which owns about 6 percent of Smithfield's outstanding shares, called on management of the Virginia-based company to consider breaking it up into separate segments - hog production, fresh pork and packaged meats - to boost its share price on the New York Stock Exchange.

Smithfield stock will no longer be publicly traded once the deal closes, expected later this year.

Under the agreement, which requires the approval of Smithfield shareholders, Shuanghui will pay $34 for each Smithfield share. The offer represents a 31 percent premium to the shares' Tuesday closing price of $25.97. Based on Smithfield's 138.8 million shares outstanding, the cash portion of the deal is worth $4.72 billion. The companies valued the deal, including assumed debt, at $7.1 billion, meaning the value of the debt is about $2.38 billion.

With annual revenue of $13 billion and more than 46,000 employees, Smithfield, based in a small Virginia town of the same name, has facilities in 26 US states, including the world's largest slaughterhouse and meat-processing plant, in North Carolina. It also has operations in Mexico and 10 European countries.

The company's brands include Smithfield ham, Farmland bacon and Healthy Ones lunch meats. It raises some 15 million pigs a year and processes 27 million, producing more than 6 billion pounds (2.7 billion kilograms) of pork.

Hong Kong-based Shuanghui owns businesses in food production, logistics and flavorings.

The deal gives Shuanghui, which already is the majority shareholder in China's largest meat-processing enterprise, a major foothold in the US food industry.

Amid a fourfold increase in the nation's annual per-capita meat consumption, China became a net importer of pork in 2008. According to the Earth Policy Institute, an environmental organization, China has imported about 400,000 metric tons of pork annually in recent years, compared with a global pork trade of almost 7 million metric tons.

In the past decade, Chinese pork prices have more than doubled, contributing to a slowdown in consumption, according to Dutch financial-services provider Rabobank.

In a statement to China Daily, the National Pork Producers Council, a Washington-based industry group, declined to comment directly on the Shuanghui-Smithfield deal, but it said the sale "does have the potential to increase US pork exports to China, which would benefit all US pork producers".

In the companies' announcement, Shuanghui Chairman Wan Long said: "Together we will be able to meet the growing demand in China for pork by importing high-quality meat products from the United States, while continuing to serve markets in the United States and around the world."

The proposed takeover is subject to approval by US regulators on antitrust and competition grounds, as well as a review by the Committee on Foreign Investment in the United States.

The interagency committee, led by the Treasury Department, evaluates large or sensitive deals involving foreign investors that could affect US national security. CFIUS has in the past rejected some proposed acquisitions by Chinese companies.

A federal judge in Washington is still considering a lawsuit by Chinese-controlled Ralls Corp that challenges Obama's nullification in September, following a CFIUS review, of a deal for Oregon wind farms near a US Navy weapons-testing facility. It was the first time in 22 years that a US president had blocked a foreign company for national security reasons.

A Treasury Department spokeswoman declined to comment, saying federal law bars CFIUS from publicly disclosing information filed with it, including whether a filing has been made.

In announcing the deal, Smithfield's Pope cited Shuanghui's recognition of the US company's "outstanding food safety practices" and said those, as well as management, won't change.

As the nation's chief regulator of meat products, both domestic and imported, the US Department of Agriculture will also have a say in the CFIUS review. That US producers, including Smithfield, export around the world makes it unlikely that safety concerns about imports would be enough to scuttle the deal.

US Representative Randy Forbes, a Republican whose southeastern Virginia congressional district includes the town of Smithfield, said the deal "warrants robust analysis and review to ensure the safety and security of America's citizens as well as the preservation of national economic interests, food safety, and environmental standards".

"I look forward to following that review process closely," Forbes said in a statement.

Andy Levine, a New York-based partner of law firm Jones Day who specializes in mergers and acquisitions, told Bloomberg Television it was unclear if the deal would clear the CFIUS review.

It's "theoretically possible", Levine said, to argue that meat products are a potential national security risk due to food production's role as critical infrastructure. An obstacle for the deal, he believes, could arise from arguments that Shuanghui would have access to sensitive technology.

In China, citizens were outraged in March when over 16,000 rotting pigs were found floating in the Huangpu River, one of Shanghai's main water sources.

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(China Daily USA 05/30/2013 page1)