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”


China: Regulator Dai Xianglong’s Windfall from Ping An Insurance deal


Relatives of a top Chinese regulator profited enormously from the purchase of shares in a once-struggling insurance company that is now one of China’s biggest financial powerhouses, according to interviews and a review of regulatory filings.

Dai Xianglong, who has had a long career as a regulator, now heads the council overseeing China’s social security fund.

The regulator, Dai Xianglong, was the head of China’s central bank and also had oversight of the insurance industry in 2002, when a company his relatives helped control bought a big stake in Ping An Insurance that years later came to be worth billions of dollars. The insurer was drawing new investors ahead of a public stock offering after averting insolvency a few years earlier.

With growing attention on the wealth amassed by families of the politically powerful in China, the investments of Mr. Dai’s relatives illustrate that the riches extend beyond the families of the political elites to the families of regulators with control of the country’s most important business and financial levers. Mr. Dai, an economist, has since left his post with the central bank and now manages the country’s $150 billion social security fund, one of the world’s biggest investment funds.

How much the relatives made in the deal is not known, but analysts say the activity raises further doubts about whether the capital markets are sufficiently regulated in China.

Nicholas C. Howson, an expert in Chinese securities law at the University of Michigan Law School, said: “While not per se illegal or even evidence of corruption, these transactions feed into a problematic perception that is widespread in the P.R.C.: the relatives of China’s highest officials are given privileged access to pre-I.P.O. properties.” He was using the abbreviation for China’s official name, the People’s Republic of China.

The company that bought the Ping An stake was controlled by a group of investment firms, including two set up by Mr. Dai’s son-in-law, Che Feng, as well as other firms associated with Mr. Che’s relatives and business associates, the regulatory filings show.

The company, Dinghe Venture Capital, got the shares for an extremely good price, the records show, paying a small fraction of what a large British bank had paid per share just two months earlier. The company paid $55 million for its Ping An shares on Dec. 26, 2002. By 2007, the last time the value of the investment was made public, the shares were worth $3.1 billion.

In its investigation, The New York Times found no indication that Mr. Dai had been aware of his relatives’ activities, or that any law had been broken. But the relatives appeared to have made a fortune by investing in financial services companies over which Mr. Dai had regulatory authority.

In another instance, in November 2002, Dinghe acquired a big stake in Haitong Securities, a brokerage firm that also fell under Mr. Dai’s jurisdiction, according to the brokerage firm’s Shanghai prospectus.

By 2007, just after Haitong’s public listing in Shanghai, those shares were worth about $1 billion, according to public filings. Later, between 2007 and 2010, Mr. Dai’s wife, Ke Yongzhen, was chairwoman on Haitong’s board of supervisors.

A spokesman for Mr. Dai and the National Social Security Fund did not return phone calls seeking comment. A spokeswoman for Mr. Che, the son-in-law, denied by e-mail that he had ever held a stake in Ping An. The spokeswoman said another businessman had bought the Ping An shares and then, facing financial difficulties, sold them to a group that included Mr. Che’s friends and relatives, but not Mr. Che.

The businessman “could not afford what he has created, so he had to sell his shares all at once,” the spokeswoman, Jenny Lau, wrote in an e-mail.

The corporate records reviewed by The Times, however, show that Mr. Che, his relatives and longtime business associates set up a complex web of companies that effectively gave him and the others control of Dinghe Venture Capital, which made the investments in Ping An and Haitong Securities. The records show that one of the companies later nominated Mr. Che to serve on the Ping An board of supervisors. His term ran from 2006 to 2009.

The Times reported last month that another investment company had also bought shares in Ping An Insurance at an unusually low price on the same day in 2002 as Dinghe Venture Capital. That company, Tianjin Taihong, was later partly controlled by relatives of Prime Minister Wen Jiabao, then serving as vice premier with oversight of China’s financial institutions. In late 2007, the shares Taihong bought in Ping An were valued at $3.7 billion.

The investments by Dinghe and Taihong are significant in part because by late 2002, Beijing regulators had granted Ping An an unusual waiver to rules that would have forced the insurer to sell off some divisions. Throughout the late 1990s, the company was fighting rules that would have required a breakup, a move that Ping An executives worried could lead to bankruptcy.

It is unclear whether Mr. Wen or Mr. Dai intervened on behalf of Ping An, but in April 2002 the company was allowed to reorganize and retain its brokerage and trust division. Two years later, Ping An sold shares to the public for the first time in Hong Kong. In 2007, after a second stock listing in Shanghai, the value of the company’s shares skyrocketed. Today, Ping An is one of the world’s biggest financial institutions, worth an estimated $65 billion.

The decision to grant the waiver came after Ping An executives and the insurer’s bankers had aggressively lobbied regulators, including Mr. Dai.

The Times reviewed copies of letters written to Mr. Dai. In one, Ma Mingzhe, the chairman of Ping An, pleaded with Mr. Dai to approve an overseas stock offering in 1998, saying, “It would be rather difficult to raise such a huge amount of money in the domestic market.”

The regulatory filings show that Dinghe, the company partly controlled by Mr. Dai’s relatives, got an extremely good deal on the shares of Ping An it had bought. In December 2002, Dinghe bought 66.5 million shares from Cosco, a Chinese state-owned shipping giant, paying about 40 cents a share, after adjusting for a later stock split, according to public filings and a report in a state-run newspaper. It was the same price paid by Taihong, the company affiliated with the relatives of Mr. Wen.

The price was much lower than what the British bank HSBC paid for a 10 percent stake in Ping An in October of that year. HSBC paid what at today’s exchange rates would be $1.60 a share.

It is unclear why Cosco would have sold Ping An shares at such a substantial discount. Cosco did not return calls seeking comment. A spokeswoman for Ping An also did not return calls.

Mr. Dai, 68, has had a long career as a government regulator and an executive at state-owned companies. He held high-level positions at the Agricultural Bank of China, China Pacific Insurance and, in the early 1990s, at the Bank of Communications, where he oversaw Haitong Securities, the bank’s brokerage division.

In 1995, he was appointed head of China’s central bank, one of the nation’s most powerful financial posts. He stepped down in December 2002 to become mayor of Tianjin. Then, in 2008, he became head of the National Council for Social Security Fund. During much of his career, he developed close ties with senior Chinese leaders, including Mr. Wen, who served with him on the powerful Central Financial Work Commission. The commission oversaw China’s banking, securities and insurance regulators, and the biggest financial institutions.

Big financial services companies also sought Mr. Dai’s aid in navigating the state’s tight regulatory environment. For instance, Ping An’s longtime chairman, Mr. Ma, kept a telephone directory with Mr. Dai’s name, as well as the name of his wife and son-in-law, according to records reviewed by The Times and an interview with a former staff assistant to Mr. Ma.

In addition, Li Chunyan, who once ran Ping An’s Beijing office, said last month in a telephone interview that he had set up meetings between Mr. Ma and relatives of Mr. Dai, including his son-in-law, Mr. Che.

“I wouldn’t say I introduced them, but I brought them,” he said, declining to give details. “I’m just a small potato, you know.” He added, “I’m very familiar with the family of Mr. Dai.”

Later, at the National Council for Social Security Fund, Mr. Dai began overseeing a huge fund that has acquired stakes in Haitong and Ping An. Last September, the government-controlled social security fund said it would allocate $3.6 billion to a group of 16 Chinese private equity funds, including New Horizon Capital, a fund whose founders include Wen Yunsong, the only son of the prime minister

Source: New York Times “Family of Chinese Regulator Profits in Insurance Firm’s Rise”