Smithfield, China’s largest takeover target in US so farPosted: May 30, 2013
In three decades, Wan Long has turned Shuanghui International Holdings from a small, loss-making meat processor into China’s largest, and is making his country’s biggest takeover of a U.S. company – the $4.7 billion acquisition of Smithfield Foods Inc (SFD.N), the world’s leading pork producer.
Along the way, the tough negotiating Wan, who also sits on the National People’s Congress, China’s legislature, has had the backing of Goldman Sachs (GS.N), Singapore state investor Temasek Holdings TEM.UL and Wen Yunsong, or Winston Wen, son of former Premier Wen Jiabao, among others.
Wan, who is dubbed ‘China’s Chief Butcher’, and Shuanghui’s connection to Winston Wen gives the firm direct access to power brokers and key decision makers in Beijing through a powerful princeling stakeholder.
The ties with Wen are through private equity firm New Horizon, which holds its stake in Shuanghui through two investment vehicles, according to a 2012 research report from China Investment Capital Corp.
While Wen stepped away from day-to-day operations at New Horizon three years ago – he left to work for China Aerospace Science & Technology Corp, and last year became chairman of China Satellite Communications Corp, according to media reports – he remains involved in the fund and derives income from its investments, people with knowledge of the matter told Reuters.
Shuanghui’s acquisition of Virginia-based Smithfield Foods 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 has said the deal raises alarms about food safety. Shuanghui was forced to recall its Shineway brand meat products from store shelves in China two years ago amid fears that some of it contained a banned feed additive.
Political scrutiny and cheaper pork supplies apart – average live hog prices in China are around a third higher than in the United States – much of the appeal for Shuanghui will be in Smithfield’s technology, quality savvy and packaged meat business.
The U.S. company owns well-known grocery store meat brands such as Eckrich, Armour and Farmland, which are likely to prove popular with Chinese consumers who consider foreign brands safer than many home-grown products.
“Shuanghui’s expansion faces problems in developing its upstream (breeding) sector in accordance with food safety requirements,” said Liu Xiaofeng, an analyst with China Minzu Securities.
Shuanghui, which controls Shenzhen-listed Henan Shuanghui Investment & Development Co (000895.SZ), China’s largest meat processor, is one of China’s few integrated meat producers, with farm-to-fork operations – but it only raises 400,000 of its own hogs a year, a fraction of the 11 million it needs, Liu said. This means the company, which has more than 61,000 employees, relies heavily on private breeders in a country where overcrowding on farms is commonplace, raising the risk of spreading disease.
Overcrowding on farms around Shanghai was the underlying factor that led to some 16,000 rotting pig carcasses floating down the Huangpu river earlier this year, according to official documents and interviews with local farmers.
Shuanghui would likely be keen to obtain Smithfield’s expertise in developing breeding farms that would help the Chinese firm establish a domestic product chain. It would also benefit from the U.S. company’s quality control.
“Smithfield has very strong know-how on producing pork and bringing products to market in a very sophisticated market,” said Michael Boddington, managing director of Asian Agribusiness Consulting.
A recent report on the U.S. Meat Export Federation website about training seminars at large Chinese meat processors, including Shuanghui, noted some participants were unfamiliar with the proper use and handling of frozen raw materials.
“In some instances, we found that while the processing equipment was very modern, there was room for improvement in terms of maintenance and sanitation,” it said.
Based in the city of Luohe in the central Henan province, Shuanghui was set up by the local government in 1958. Wan was appointed as head of the firm in 1984 and steered it through a restructuring and a successful initial public offering in 1998.
After the local government sold its stake in 2006, Shuanghui transformed itself into its current complex corporate structure.
Shuanghui International is an offshore entity registered in Hong Kong, and is 5.2 percent invested by Goldman Sachs’ main investing arm and 33.7 percent-held by funds associated with China-focused private equity firm CDH. New Horizon holds 4.2 percent, and Temasek 2.8 percent.
Source: Reuters “With big-name backers, Chinese firm eyes Smithfield’s know-how, brands”