China’s appetite for pork spurs $4.7 billion buyout of US company

Shuanghui International Holdings is buying Smithfield Foods Inc, the world's biggest hog producer, for $4.7 billion (€3.6 billion) to feed a growing Chinese appetite for US pork, in a deal that has stirred concern among US politicians.

Announced yesterday, the takeover would be China’s biggest of a US company, with an enterprise value of $7.1 billion (€5.8 billion), including debt, and follows a call by Smithfield’s largest shareholder, Continental Grain Co, to break up the company. Continental could not be reached for comment on Shuanghui’s proposal.

The deal highlights China's growing appetite for protein-rich food, particularly pork, as its middle class expands, making China more reliant on foreign producers.

“I think this is a move by China to make sure their population is going to get fed in a cheaper manner. It’s the right move for them,” said Brian Bradshaw, a pig producer with operations in Illinois and Indiana, who has sold hogs to Smithfield. “Time will tell whether it’s the right move for the rest of the pork industry.”

The deal will face scrutiny by the Committee on Foreign Investment in the United States (CFIUS), a government panel that assesses national security risks. At least one member of Congress said the deal raised alarms about food safety, noting Shuanghui was forced to recall tainted pork in the past.

“I have deep doubts about whether this merger best serves American consumers, and urge federal regulators to put their concerns first,” US Representative Rose DeLauro, a Democrat from Connecticut, said in a statement.

Complex structure

Shuanghui, which controls Henan Shuanghui Investment & Development Co, China’s largest meat processor, would be joining forces with a company that has a global herd of 1.09 million sows, according to Successful Farming magazine, and which raises close to 16 million hogs a year.

The US firm, which also brings its grocery brands such as Armour, Eckrich and Farmland, earned 11 per cent of its $13.1 billion revenue in the year to April 2012 outside the United States, including in China.

Goldman Sachs’ main investing arm owns a 5.2 per cent stake in an offshore affiliate of Shuanghui International, public filings show. Funds associated with China-focused private equity firm CDH own 33.7 per cent of the same offshore affiliate, and Singapore state investor Temasek owns 2.8 per cent.

Shares in Henan Shuanghui jumped as much as 10 per cent in trading on the Shenzhen stock market today. Shares in Smithfield, founded in 1936 as a single meat-packing plant in Smithfield, Virginia, rose to as high as $33.96 yesterday, close to Shuanghui’s $34 offer price. Shuanghui is offering a 31 per cent premium to Smithfield’s Tuesday closing price, and would take on $2.4 billion of Smithfield debt.

Smithfield options also jumped ahead of the offer, raising concerns that the news may have reached some investors ahead of time.

The deal will help Smithfield sell its products to a growing Chinese middle-class through Shuanghui’s distribution network, while Shuanghui gains access to high-quality and safe US products, said company chairman Wan Long.

Food scandals

Demand for US meat in China has risen 10-fold over the past decade, fuelled in part by a series of food safety scandals - from rat meat passed off as pork to thousands of pig carcasses floating down a river. Public anxiety over cases of fake or toxic food often spreads quickly.

Shuanghui itself was forced to recall its Shineway brand meat products from store shelves two years ago amid fears that some of it contained a banned feed additive called clenbuterol.

In that respect, the Smithfield deal may help quell Chinese concerns over the use of ractopamine, a similar additive commonly used by US hog producers to bulk up animals with muscle instead of fat, without increasing the amount of feed. Smithfield has been trying to stop using ractopamine, which is banned in China and Russia - an effort that could enhance its appeal as an exporter.

Reuters