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September 30, 2013

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Home » Business » Biz Commentary

Sweet or sour? Pork giants merge

By Wang Yanlin | September 30, 2013, Monday | Print Edition

Shuanghui International Holdings Ltd’s purchase of US-based Smithfield Foods Inc, bringing together the world’s largest pork producer and processor with the world’s biggest pork-consuming market, looks like a marriage made in hog heaven.

The US$7.1 billion deal is the largest takeover to date of an American company by a Chinese firm.

On September 24, Virginia-based Smithfield, the world’s biggest meat processor, said more than 96 percent of the votes cast by its shareholders supported the US$34-a-share takeover, which comprised a US$4.5 billion cash offer and assumption of debt. The vote came a few weeks after the deal was approved by the Committee on Foreign Investment in the United States.

Shuanghui, China’s biggest meat processor, congratulated itself with a crimson banner on its website — pointing to what may be a bright spot in China’s sometimes disappointing track record of foreign takeover attempts.

But now the hard part begins. It’s one thing to seal a deal; it’s another to deliver solid performance in the future.

“It is difficult to gauge the success of the deal or who it will be successful for,” said Jon Copestake, chief retail and consumer goods analyst at the Economist Intelligence Unit.

The deal delivers return on equity for Smithfield shareholders and a significant food business for Shuanghui. Smithfield has integrated its supply chain to exploit rising hog prices, Copestake said.

Smithfield, which was delisted on the New York Exchange Stock on September 26, now becomes a wholly owned subsidiary of Shuanghui, China’s largest meat producer and processor. The Smithfield brand will be retained.

China is the world’s biggest pork market, with consumption estimated at 52 million tons last year. Smithfield CEO Larry Pope said the deal marks “a new era” for his company because it unlocks growth opportunities in the Chinese market. Cautiously, he added Smithfield will continue to be defined by strictest adherence to the highest standards of food safety and quality.

According to a document presented by the US law firm Covington & Burling LLP, agriculture is among the least sensitive of US takeover targets, unlike energy, information technology, defense and telecommunications — sectors where Chinese takeover efforts have been blocked in the past.

Still, the Shuanghui offer, first unveiled in May, provoked a chorus of criticism.

Opponents said China would benefit from US land, water and technology, calling it a trend that should be avoided.

Another concern stemmed from perceptions that Chinese food companies aren’t committed to quality standards. To be frank, Shuanghui’s reputation has been far from exemplary. Just two years ago, a subsidiary of Shuanghui was caught using prohibited chemicals in its pig feed. The Chinese market has been periodically shaken by reports of food contamination and slack controls.

Smithfield is a well-respected brand, created in 1936. The company has annual sales of US$13 billion and employs about 46,000 people. At home, it was facing declining demand and higher production costs.

Deep distrust

Opposition to the takeover underscores the deep distrust many Americans hold toward Chinese companies, said Xue Jun, an analyst on trade at CITIC Securities Co.

“China should make the effort to improve its reputation for quality, otherwise, it will become a hurdle for future investments, which are expected to reach US$500 billion in the next five years,” Xue said.

At the recent World Chinese Entrepreneurs Convention held in Chengdu, capital of Sichuan Province, Deputy Minister of Commerce Li Jinzao said China will accelerate the pace of overseas investment and encourage more companies to join the 10,500 Chinese businesses that have already expanded abroad.

China became the world’s third-largest overseas investor for the first time last year, according to the ministry. Outbound investment rose 17.6 percent to US$87.7 billion while other global investors pared investment by 17 percent.

In particular, Chinese investment in the US surged 123.5 percent to US$4.04 billion in 2012, making the US the second-largest offshore market for mainland funds after Hong Kong.

Some in the US don’t want to see that trend reversed.

In a recent visit to Shanghai, Karen Ross, secretary of the California Department of Food and Agriculture, called the Smithfield deal “a new way of collaboration” and said she would welcome investors like Shuanghui to come to California.

“Smithfield has a very integrated system that enables it to be efficient and traceable,” Ross said. “The deal may bring some of the best US models to China.”

Cash-rich Chinese conglomerates are certainly seeking opportunities abroad.

“Given that Western markets have weaker demand at the moment, there is an opportunity for Chinese firms to pick up ailing Western business very cheaply,” Copestake said.  He went on to point out, however, that “relative stagnation, regulatory hurdles and a perceived lack of consumer trust in Chinese safety standards may cause some problems in making these businesses successful.”

Copestake may be right. Smithfield products may find less enthusiastic demand in the US after the deal. And in the Chinese market, will Shuanghui sell Smithfield meat in competition to its own domestic brands?

It’s too early to tell whether the Smithfield takeover will evolve into one of China’s most successful overseas forays. But it does remind us of a basic feature of the global village. Businesses exist to make money, and they need to expand into markets — even across borders — where demand exists.

US investors have applied that formula successfully in China, so why shouldn’t it work for Chinese counterparts chasing opportunities in the US?

 

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