Washington may still be digesting news of China Inc’s latest bold move into America with the nearly $5 billion takeover of Smithfield Foods Inc (SFD.N), but early indications are the deal will not inflame enough nationalistic opposition to kill it, and success could pave the way for more Chinese purchases.
Shuanghui International Holdings’ agreement to buy Smithfield would be the largest ever acquisition of a U.S. company by a Chinese one. The bid – an effort to feed a growing Chinese appetite for U.S. pork – has stirred some concern among U.S. politicians and will face review by a Treasury committee.
To many dealmakers and executives, that review is procedural and should not set off alarms.
“I don’t think the Smithfield deal will have problems,” said David Marchick, who leads private equity firm Carlyle Group LP’s (CG.O) government, public and regulatory affairs and was not involved in the deal. “It’s not a sensitive sector. They are keeping American management. And the U.S. agricultural community would love to export more to China.”
Carlyle, which has done several deals involving China, did not encounter any problems last year when it sold one of its portfolio companies, U.S. movie theater operator AMC Entertainment, to Chinese conglomerate Dalian Wanda Group, Marchick said. The $2.6 billion deal was the fifth largest M&A transaction by a Chinese company in the United States, according to Thomson Reuters data.
“Most Chinese acquisitions in the U.S. will not encounter regulatory or political challenges. Three or four deals a year do encounter problems – and garner all the attention,” said Marchick, who has co-authored a book on U.S. national security and foreign direct investment.
The Smithfield deal could certainly still face opposition on Capitol Hill. Congress is out of session right now, and foreign policy hawks such as Senator Charles Schumer of New York and Senator John McCain of Arizona have yet to weigh in. Last week both Senators expressed concerns about the takeover of Sprint Nextel Corp (S.N) by Japan’s SoftBank Corp (9984.T), due mainly to security concerns related to telecom equipment from China.
Chinese companies have become more comfortable looking to do deals in the United States, in spite of the 2005 rejection of China National Offshore Oil Corp’s (0883.HK) $18.5 billion attempt to buy U.S. energy company Unocal. CNOOC’s bid was thwarted by fierce political opposition because of national security concerns.
With over $10.5 billion of deals by Chinese companies in the United States so far, 2013 is on pace to be the largest year ever for inbound M&A by Chinese companies, according to Thomson Reuters data. There were $11.5 billion worth of deals by Chinese companies in the United States in 2012, which was itself a significantly higher figure than in any year other than 2007.
“I do think it’s helpful to get a large transaction with a Chinese buyer through,” said Adel Aslani-Far, global co-chair of the M&A practice at Latham & Watkins. “It’s a shot in the arm to the deal economy and to attitudes about Chinese deals. Something sizable like this could be a very good sign to the market that the conditions are right here and will encourage further Chinese investment into the U.S.”
Smithfield shares were trading at around $32.94 on Friday, 3.1 percent below the $34 a share offered by Shuanghui.
NATIONAL SECURITY QUESTIONS
Shuanghui’s acquisition of Virginia-based Smithfield Foods will face scrutiny by the Treasury’s Committee on Foreign Investment in the United States, known as CFIUS. Congress has no authority to block the deal but can exert political pressure.
The Smithfield deal has generated limited response from Congress so far with only a handful of lawmakers – notably Charles Grassley, Republican Senator from Iowa, the largest U.S. hog producing state – expressing doubts.
“No one can deny the unsafe tactics used by some Chinese food companies. And, to have a Chinese food company controlling a major U.S. meat supplier, without shareholder accountability, is a bit concerning,” Grassley said in a statement.
Some China skeptics, including Democratic Senator Sherrod Brown of Ohio, have supported the deal in principal, and Randy Forbes, the Republican who represents Smithfield’s Congressional district in Virginia, was measured in his response.
Forbes said the potential takeover “warrants robust analysis and review to ensure the safety and security of America’s citizens as well as the preservation of national economic interests, food safety, and environmental standards. I look forward to following that review process closely.”
Mark McMinimy, a policy analyst with Guggenheim Securities in Washington, said the deal “is not likely to face serious U.S. government-related roadblocks,” and also is not likely to run into resistance when it is reviewed by CFIUS.
The interagency government panel reviews transactions that would bring U.S. businesses under foreign-owned control and is comprised of the heads of a number of departments, including Treasury, State, Justice, Commerce and Homeland Security. Its deliberations are tightly guarded.
“CFIUS’s scrutiny of this acquisition is vitally important. How might this deal impact our national security? What role does the Chinese government play in Shuanghui, like it does in so many other ‘private’ companies? These are important questions for CFIUS to get answered,” Grassley said.
Aaron Schock, an Illinois Republican and a member of the House subcommittee on trade whose district includes several hog farms, raised concerns about food safety. “We have to be cautious that a Chinese-run firm wouldn’t result in Chinese standards here in the U.S.,” he said. “The safety of the consumer is the utmost concern and if that can’t be dealt with, then this deal might be for naught.”
The National Farmers Union, which mostly represents family farms and co-ops, said it opposed the deal out of concerns about concentration in the agricultural markets. “Now, in one fell swoop, 26 percent of U.S. pork processing and 15 percent of domestic hog production will be controlled by a foreign company,” it said in a statement.
Given that the company is not focused on defense, energy, or infrastructure, approval seems likely, according to Charles Skuba, a business professor at Georgetown University.
Shuanghui has promised not to close or move any of Smithfield’s operations and will keep current management, including CEO Larry Pope, in place.
“We may have some CFIUS concerns in relation to exactly what land Smithfield owns and what its proximity is to sensitive national security installations. But for the most part, I think they can work around that,” said Skuba.
Paul Marquardt, a partner at Cleary Gottlieb who works on cross-border deals, said that CFIUS review is a concern for Chinese companies looking to expand in the United States since they often say they find the process opaque and unfair.
“I think a successful deal will help convince Chinese firms that they can get a fair shake in the U.S. They need to see that just because a deal is Chinese doesn’t mean it will be blocked,” Marquardt said.
Source: Reuters “China Inc’s Smithfield bid expected to pass Washington test”
Related post: Smithfield China’s largest takeover target in US so far dated yesterday
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”