China set for largest takeover of US firm

One of the biggest pork producers in the US has agreed to be bought by the majority shareholder of China’s largest meat processor for about $4.72bn. 

It is the largest takeover of a US company by a Chinese firm – and the latest example of China’s growing appetite for US investment.

The deal with Shuanghui International Holdings Ltd still faces a federal regulatory review and Smithfield Foods Inc shareholder approval.

And the acquisition is likely to face strong US scrutiny, coming at a time of serious food safety concerns in China, some of which have included Shuanghui.

Risks to the US food supply “enters everybody’s mind,” said Paul Mariani, director at Variant Capital Advisors in Chicago. But he said he believes Smithfield will continue to operate as normal.

Smithfield said the deal is not about importing Chinese pork into the US Instead, the company says it is a chance to export into new markets with its brands, such as Smithfield, Armour and Farmland.

Smithfield CEO Larry Pope 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”.

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 company’s closing stock price of $25.97 on Tuesday.

Chinese consumers

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

The acquisition highlights growing interest in US food by Chinese consumers. Foreign food, such as milk powder from New Zealand and vegetables from neighbouring Asian countries, is prized because of the frequent domestic food safety scandals in China.

In the most notorious case, 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 that 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 conservative US-based think tank, said companies like Shuanghui are “not looking to cause any trouble in the American market at all”.

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

Pushy shareholders

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

The company needs to raise prices to offset rising commodity costs, namely the corn it uses for feed. But consumers are still 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 on Wednesday.