Smithfield, China’s largest takeover target in US so far


Smithfield ham slices are on sale at the Taste of Smithfield restaurant and gourmet market in Smithfield, Virginia May 30, 2013.  Credit: REUTERS/Rich-Joseph Facun

Smithfield ham slices are on sale at the Taste of Smithfield restaurant and gourmet market in Smithfield, Virginia May 30, 2013.
Credit: REUTERS/Rich-Joseph Facun

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.

BRANDS, KNOW-HOW

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.

QUALITY STAMP

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”


Overcrowding on farms behind mystery of China’s floating pigs


Dead pigs float in a branch of Huangpu River in Pinghu, Zhejiang province, March 11, 2013. REUTER/Aly Song

Dead pigs float in a branch of Huangpu River in Pinghu, Zhejiang province, March 11, 2013. REUTER/Aly Song

Overcrowding on farms around Shanghai was the underlying factor that led to 16,000 dead pigs floating down the Huangpu river into China’s affluent financial centre, according to an analysis of official documents and interviews with farmers in the region.

The appearance last month of carcasses of rotting hogs in a river that supplies tap water to the eastern Chinese city was a morbid reminder of the pressures facing China’s mostly small-scale farmers as the country grapples with food safety scares, environmental pressures and, most recently, a bird flu outbreak.

Until now the main reason for Shanghai’s startling outbreak of dead hogs appeared to have been a local government crackdown on criminal gangs that had been selling abandoned carcasses as meat on the black market, meaning fewer ended up in the river.

But a deeper look suggests that an unsustainable level of overcrowding — a key factor in the spread of disease and death rates — was the critical issue. Experts warn that if conditions are not improved the incident may not have been a one-off.

“We can’t let things go on the way they are or it won’t just be the 10,000 or so pigs in the river this year, we’ll see more in the coming years,” said Xu Yafeng, CEO of NX28, a specialist web platform for agricultural information.

In an acknowledgement of the problem, officials launched a plan late last year to slash the number of pigs in the region — a drive that may have made things worse in the short-term by cutting the amount of land available for farming before there was a corresponding reduction in livestock.

The number of pigs in Jiaxing, a city just to the west of Shanghai identified as the main source of the dead pigs, more than doubled over the last two decades. It hit 7.5 million in 2012, even as the local government cut the amount of land available for farmers.

This overcrowding of pigs led to the city-wide plan to cut hog numbers to below 2 million within just two years.

” the winter to this spring, the trend of dead pigs has been particularly serious,” Wang Xianjun, a local environmental official, told the Jiaxing Daily in March.

“We keep digging more pits to deal with the dead pigs, but if it carries on like this, they won’t be able to take them.”

Wang’s words proved prophetic. Just four days later, the first reports emerged of pigs drifting down the Huangpu.

Local officials contacted by Reuters declined to comment.

FARMING BOOM

China’s booming demand for meat has the potential to create ever more crowded farms, ripe for the spread of disease. Pork demand is expected to grow around 20 percent from 2012 levels to 60 million tons by 2020, according to a recent Rabobank report.

The number of small hog farmers around Jiaxing climbed over the last few years as pork prices surged, resulting in far too many pigs for the land available.

Data from a Nanhu district government document in September shows in 2011 the key hog farming town of Xinfeng had a level of 15.3 pigs per mu (667 sq meters), three times higher than the level of five hogs per mu local officials recommended in August 2012. The nearby village of Fengqiao had levels of 10 hog per mu.

“Disease and mortality rates among the pigs have got worse every year,” said one woman in the farming area of Henggang on the outskirts of Jiaxing. “In some areas this year mortality rates were probably as high as 30 percent.”

The normal mortality rate for pigs in China is around 3 to 5 percent, Fang Yan, the deputy head of the rural department of China’s state planning bureau, told a news conference in Beijing.

The high density of pig farms, and the poor farm management that is often associated with small-scale farming operations, are key risk factors for porcine circovirus — a common disease among pigs that is the most likely killer of the floating hogs — according to many academic and scientific papers.

Since 2012, however, oversupply has driven pork prices down sharply. Between the end of January and mid-March this year, prices tumbled 16.2 percent.

This had a further impact on disease and mortality rates –when prices are weak, farmers tend to take less care of their livestock, said Tao Shi, a Shanghai-based expert on hog farming.

Increasingly aware of the urgency of the issue, the Jiaxing government launched its plan last September to reduce the number of hogs by two-thirds and to slash the amount of land available for farming by around 40 percent.

“DESTROY THE PIG PENS”

Since the carcasses were discovered in the Huangpu, the response has accelerated. A visit to several farming districts around Jiaxing revealed empty sties, which locals said had been recently vacated for demolition.

Three local women in Henggang told Reuters that pig farmers were being given financial incentives to abandon the land, while one official sign, recently painted on the wall of a nearby factory, read: “Destroy the pig pens, lead a happy life.”

Many farmers are not happy. One 40-year-old said he has been ordered to close down his farm, while another farmer Reuters interviewed was in the middle of selling his pigs at a loss of 150 yuan ($24) per head after being told his farm contravened the regulations. Neither wanted their names used.

“They can’t just do it this way and wipe us out so fast,” the farmer said, as all but one of his pigs were taken away in two crowded trucks over the space of 30 minutes.

The surge of dead pigs demonstrates the wider pressures China’s farmers now confront. Limited land access, falling pork prices, tighter profit margins and the rapid spread of urbanization forces some farmers off the land entirely. Others are pushed to farm in ever more crowded conditions.

Many Chinese pig farmers use medicated feed containing antibiotics to help stave off disease, but cost pressures have led some to cut back on expensive vaccines in favor of giving medication later when illness strikes. Others skirt incineration costs by dumping livestock.

David Mahon, Beijing-based managing director of Mahon China Investment Management said the pressure on farmers’ margins was huge, which could lead to some farmers cutting corners.

“If you push (farmers) to this point, they’ll do anything to save costs.” ($1 = 6.1791 Chinese yuan)

Source: Reuters “Overcrowding on farms behind mystery of China’s floating pigs”