Chinese in $4.7B deal for top U.S. pork producer

Richmond, Va. • The ham sandwich you had for lunch is the latest example of China's growing appetite for U.S. investment.

Smithfield Foods Inc., one of the biggest pork producers in the U.S., on Wednesday agreed to be bought by Shuanghui International Holdings Ltd., the majority shareholder in China's largest meat processor, for $4.72 billion.

The deal, which still faces a federal regulatory review and Smithfield shareholder approval, is the largest takeover of a U.S. company by a Chinese firm. It's the latest in a string of such deals made recently by Chinese companies.

But the acquisition is likely to face hefty U.S. scrutiny. It comes at a time when China has had serious food safety concerns, some of which have included Smithfield's suitor, Hong Kong-based Shuanghui.

Risks to the U.S. food supply "enter everybody's mind," said Paul Mariani, director at Variant Capital Advisors in Chicago, who previously worked at a food and agribusiness boutique investment bank. But he said he believes Smithfield will continue to operate as normal.

Smithfield said the deal isn't about importing Chinese pork into the U.S. Instead, the company says it's a chance to export into new markets with its brands, such as Smithfield, Armour and Farmland.

Larry Pope, Smithfield's CEO, said in a conference call on Wednesday that the transaction "preserves the same old Smithfield, only with more opportunities and new markets and new frontiers."

"People have this belief ... that everything in America is made in China," he said. "Open your refrigerator door, look inside. Nothing in there is made in China because American agriculture is the most competitive and efficient in the world."

Indeed, the acquisition highlights what could be growing interest in American food by Chinese consumers. Foreign food, such as milk powder from New Zealand and vegetables from neighboring Asian countries, is prized by Chinese consumers because of the frequent domestic food safety scandals in their country.

Among the most notorious, six babies died and 300,000 were sickened in 2008 from drinking infant formula and other dairy tainted with the industrial chemical melamine. And Shuanghui's reputation was battered in 2011 when state broadcaster CCTV revealed its pork contained clenbuterol — a banned chemical that makes pork leaner but can be harmful to humans.

Derek Scissors, an expert on China's economy with the Heritage Foundation, a Washington-based conservative think tank, said companies like Shuanghui are "not looking to cause any trouble in the American market at all" or "cut corners."

"Quite the opposite ... They want to gain from what the U.S. is able to do," he said. "But whether they can operate an American company in the U.S. market remains to be determined."

The deal comes as Smithfield has been under pressure to improve its business.

Like most pork producers, Smithfield has been caught in a tug of war with consumers. The company needs to raise prices to offset rising commodity costs, namely the corn it uses for feed. But consumers are still extremely sensitive to price changes in the current economy. By raising prices, Smithfield risks cutting into its sales should consumers cut back or buy cheaper meats, such as chicken.

In recent months, Continental Grain Co., one of Smithfield's largest shareholders, had been pushing Smithfield to consider splitting itself up, saying it was time for the company to "get serious about creating shareholder value."

Following a March letter from Continental Grain, Smithfield said it would review the suggestions "in due course." Representatives from Continental Grain did not immediately comment on the deal announced Wednesday.

In its most recent quarter, the company reported that its net income rose more than 3 percent, helped by gains in hog production, its international business and its packaged meats such as deli meats, bacon, sausage, and hot dogs — a large growth area for the company.

Shuanghui gives Smithfield new opportunities. The company owns a variety of global businesses that include food, logistics and flavoring products.

Under the terms of the Shuanghui-Smithfield deal, which was unanimously approved by both companies' boards, shareholders of Smithfield will receive $34 per share — a 31 percent premium to the Smithfield, Va., company's closing stock price of $25.97 on Tuesday.

The companies put the deal's total value at about $7.1 billion, including debt. Smithfield's stock will no longer be publicly traded once the deal closes.

The Smithfield deal including assumed debt would eclipse the Chinese purchase of a stake in a big U.S. investment firm as well. In December 2007, China Investment Corp. bought a 9.9 percent stake in Morgan Stanley valued at $5.6 billion, according to research firm Dealogic.

Smithfield shares surged $7.38, or about 29 percent, to close at $33.35 on Wednesday.

Smithfield's existing management team will remain in place and Shuanghui also will honor the collective bargaining agreements with Smithfield workers. The company has about 46,000 employees.

The transaction is subject to review by the U.S. Committee on Foreign Investment, which evaluates the potential national security effects of transactions. The process typically includes a 30-day initial review, followed by a 45-day investigation before making a recommendation to the president.

China has accused the U.S. of discriminating against its companies, although analysts say American firms face bigger obstructions investing in China.

The deal comes as Chinese investment in U.S. firms, while still comparatively low, has risen sharply in recent years, topping $6.5 billion in 2012 and totaling more than $10 billion in deals in the pipeline so far this year, according Thilo Hanemann of New York research firm Rhodium Group. The data reflect investments that meet the threshold for foreign direct investment, which is a final stake of 10 percent or more of voting rights in the invested company and excludes portfolio investments such as government bonds.

Much of the investments are in energy, advanced manufacturing and technology, as well as entertainment, hospitality and safe-haven assets like real estate.

"It's good news for the U.S. economy and for U.S. manufacturing because Chinese companies are keen to capitalized made in the U.S. brands," Hanemann said. "The level of Chinese investment is still too low to call it a savior ... (but) the potential for future growth is huge."