Smithfield Foods agrees to be purchased by Shuanghui in record deal

July 2013 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Following nearly four years of sporadic negotiations, Shuanghui International Holdings Limited and Smithfield Foods Inc. announced on 29 May that they had entered into a definitive merger agreement, valuing Smithfield at roughly $7.1bn including net debt.

Once completed, the deal – which will see Shuanghui pay $4.7bn in cash – will be the biggest ever takeover of an American company by a Chinese firm, eclipsing the $4.2bn acquisition of International Lease Finance by a Chinese investor group in 2012. Bank of China and Morgan Stanley reportedly combined to provide $7bn worth of loans to finance the deal.

The transaction is expected to close in the second half of 2013 and will see Shuanghui acquire all of the outstanding shares of Smithfield for $34 per share. The agreed price represents a premium of approximately 31 percent over Smithfield’s closing price on 28 May, the final day of trading before the merger was announced.

Upon the transaction’s closure, Smithfield will become a privately held company, and will retain its existing management team and workforce. Shuanghui has also agreed to honour the existing collective bargaining agreements in place with Smithfield employees. In a statement announcing the deal, C. Larry Pope, president and chief executive officer of Smithfield, said “This is a great transaction for all Smithfield stakeholders, as well as for American farmers and US agriculture. We have established Smithfield as the world’s leading and most trusted vertically integrated pork processor and hog producer, and are excited that Shuanghui recognises our best-in-class operations, our outstanding food safety practices and our 46,000 hard-working and dedicated employees.”

Although the terms of the deal have been unanimously approved by the shareholders of both companies, the transaction will be subject to intense regulatory scrutiny. The deal will be reviewed by the Committee on Foreign Investment in the United States (CFIUS) for national security purposes. Although the committee usually concerns itself with transactions involving technology firms or natural resources, it will review the Smithfield deal amid concerns that the records of the 87 year-old Virginia based company may contain sensitive information about some of its previous clients. The committee’s process typically includes a 30 day initial review, followed by a 45 day investigation and a final recommendation.

The purchase of Smithfield comes at a time when China has had to face up to some serious food safety scandals, a number of which have included Shuanghui. Recently there have been very high profile scares concerning Chinese meat products. The country has suffered from outbreaks of bird flu, had to endure the sight of thousands of dead pigs floating in the Huangpu River and the revelation from China Central Television that Shuanghui has been selling pork contaminated with the banned substance clenbuterol.

Smithfield has insisted that, despite fears Shuanghui would use the merger to cheaply import potentially harmful, poor quality Chinese pork products into the US, the takeover is intended to produce the opposite effect, increasing the exposure of the company’s brands in Asia. “This transaction will allow us access to Asia in a big way,” said Mr Pope. “This is an export deal, and they are very interested in exporting products out of the US.” On 3 June, Senate Agriculture Committee Chairwoman Debbie Stabenow raised concerns about Shuanghui’s “troubling record on food safety”, while a number of Senator Stabenow’s colleagues in Washington also registered their concerns surrounding the deal shortly afterwards.

The deal for Smithfield is indicative of China’s growing interest in foreign, particularly American, foodstuffs. In 2012 the US exported around $866m worth of pork products to China, accounting for 14 percent of all US pork exports. The last 10 years has seen an explosion in demand for meat in China as the nation’s burgeoning middle class has begun to transition away from a diet predominantly featuring rice and vegetables, towards one including more protein. However, China has struggled to produce enough clean, domestic produce to keep up with demand. Not only does China have a questionable food safety record, but the nation’s production techniques are also inefficient and expensive. Furthermore, the relatively small scale of the available farms in China means that the cost of producing pork and other meats has escalated quickly.

By importing Smithfield’s products, Shuanghui will gain greater access to imported products which meet far more stringent food safety standards.

Although the boards of both companies have agreed to the deal, at the time of writing Smithfield still had 30 days in which to hold talks with other parties.

Richard Summerfield