Chinese company to acquire Smithfield Foods for $4.7 billion

dbracken@newsobserver.comMay 29, 2013 

  • Chinese investment

    Private Chinese businesses and the Chinese government have increased their investment in U.S. businesses and real estate over the past several years. Here are a few examples:

    • In the Triangle, Chinese computer maker Lenovo bought IBM’s PC division in 2005 for $1.25 billion.

    • In December 2007, China Investment Corp. bought a stake in Morgan Stanley valued at $5.6 billion.

    • Earlier this month, the Chinese conglomerate Dalian Wanda Group said it would buy Kansas-based AMC Entertainment Holdings, the U.S. movie chain, for $2.6 billion.

Smithfield Foods, one of North Carolina’s largest employers, has agreed to sell itself to a Chinese company in a $4.72 billion deal that could have far-reaching implications for the state’s multibillion-dollar pork industry.

Virginia-based Smithfield would become a subsidiary of Shuanghui International Holdings, China’s largest pork producer. If approved by Smithfield shareholders and government authorities, it would be the largest acquisition of a U.S. company by a Chinese company.

Smithfield CEO C. Larry Pope on Wednesday hailed the deal, saying it would allow the company to increase exports to fast-growing markets in China and Asia as it takes advantage of Shuanghui’s extensive distribution network. He also dismissed concerns about Chinese ownership of an American food producer, saying Smithfield would continue to operate with the same quality standards as it does today.

“This is not selling out to the Chinese. This is Smithfield being part of a global organization,” Pope said on a conference call with reporters. “This guarantees the future.”

About 10,000 of Smithfield’s 46,000 worldwide employees are in North Carolina, where the company has a slaughterhouse in Tar Heel and packaging plants in Kinston, Clinton and Wilson. Pope said Shuanghui has no plans to close any facilities or lay off workers.

“Shuanghui is committed to maintaining Smithfield’s operations, its staff and its management,” he said.

Smithfield, the world’s largest pork processor, also owns hog farms and contracts with other farmers throughout the state. Pope said the acquisition would ultimately benefit farmers in North Carolina and elsewhere, as it would secure steady demand for their hogs as Chinese consumers add more protein to their diet.

No exports to U.S.

China already consumes more protein than any other country, but its efforts to increase production internally have been slowed by food safety issues. Shuanghui’s reputation took a hit in 2011 when it recalled meat that had been found to contain a banned drug, but Pope said the company now has the most extensive testing operation in China and has no plans to export to the United States.

He said Shuanghui’s interest in Smithfield reflected both the quality of USDA-certified pork and American farmers’ ability to produce it at a low cost.

“Farmers should be standing up and cheering this deal,” he said. “This gives them access to the world’s largest market that has been difficult at times to access.”

Smithfield has had a business relationship with Hong Kong-based Shuanghui for several years, and nearly all the pork that it now exports to China through that relationship is processed and packaged in North Carolina. Last year, at Shuanghui’s request, Smithfield began converting two of its North Carolina facilities to be free of ractopamine, a feed additive that is banned in China and Russia.

‘No reason not to trust them’

Bob Livingston, a farmer in Bladen County who has been selling hogs to Smithfield for 19 years, said he didn’t really know what to make of the news that a Chinese company was buying his business partner.

Livingston, 73, is well aware of the challenges now facing both the pork and poultry industries in the United States. Producers have been under pressure from rising corn prices, the main ingredient in animal feed, and from an inability to offset those costs by charging consumers more.

But Livingston lauds Smithfield for its ability to control costs and run an efficient operation.

“They’ve given me no reason not to trust them,” he said.

Livingston’s relationship with Smithfield is what allows him to secure the financing to run his 2,400-sow farm. If the company’s acquisition by Shuanghui results in increased exports, he figures ultimately it should be good for his farm.

“It would probably make our situation more stable here,” he said. “The world’s going to need pork. They love pork.”

The transaction still needs to be approved by Smithfield’s shareholders. It will also require the approval of antitrust regulators and the U.S. Committee on Foreign Investment, which reviews transactions with potential national security implications.

Congress could hold hearings or pass legislation to block the sale, but it was unclear Wednesday what, if any, opposition the deal might face.

Rep. Mike McIntyre of Lumberton, the No. 2 top-ranked Democrat on the House Agriculture Committee, said in a statement that the potential new markets opened up by the acquisition could give a boost to Eastern North Carolina’s economy.

“This is a great success story for both business and agriculture in our state,” McIntyre said. “This will also help farm income rise and agriculture exports rise.”

Entries into the Chinese market

But Michael Wessel, a commissioner on the U.S.-China Economic and Security Review Commission, said the deal raises a host of questions. The commission was created in 2000 to monitor and investigate the national security implications of bilateral trade and economic relationships between the two countries.

Wessel, who was speaking for himself and not the commission, said in an email that for years U.S. companies have been trying to get their pork into China on a regular basis.

“Now that China is seeking new foreign sources of pork, rather than buy it on the open market, as most trading nations would do, their first choice is to buy the company,” he said. “What happens to hog farmers around the country who presently do not supply Smithfield? Will China let their products in, or only the products produced by a company they own.”

Stock jumps 28 percent

Shuanghui has agreed to pay $34 a share for Smithfield, a 31 percent premium over Smithfield’s closing stock price Tuesday. The deal, which is expected to close in the second half of the year, values Smithfield at $7.1 billion after including the company’s debt. Investors lauded the news, pushing Smithfield shares up 28 percent to close Wednesday at $33.35.

Smithfield’s management has been frustrated by Wall Street’s valuation of the company, which led it to seek out ways to increase value for shareholders. Some investors, including one of Smithfield’s largest shareholders, have been calling for the company to be broken up and for the sale of its hog farm operations and its European operations.

Pope said Shuanghui is committed to keeping the company together and running it as an American company owned by a Chinese parent.

“The U.S. market is mature,” he said. “… For our company to grow, we have to go someplace else. What these folks have done is committed, in a very strong way, to learning from us.”

Renee Schoof of the McClatchy Washington Bureau contributed.

Bracken: 919-829-4548

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