CONSUMER: WH Group’s Campofrio Sale: Overseas Indigestion?
Bottom line: WH Group’s decision to sell its stake in Spain’s Campofrio just a year after the purchase reflects its need for cash to pay down a big debt load, and also overly optimistic expectations at the time of the acquisition.
Just a year after making its second major global acquisition, Chinese meat processing giant WH Group (HKEx: 288) is having second thoughts about Spain’s Campofrio and is selling its stake in the company. WH Group gave a brief statement on the move, which appears to show it needed the cash and that Campofio was dragging on its financial performance. If that’s the case, this unusually quick flip-flop reflects one of the biggest risks that Chinese companies will face as they shop in an unfamiliar global marketplace that is quite different from their own home market.
WH Group said it will sell its 37 percent stake in Campofrio for $354 million to Mexican conglomerate Alfa. (company announcement; Chinese article) WH Group, which was formerly known as Shuanghui, teamed up last June to buy Campofrio together with Alfa unit Sigma Alimentos. Campofrio was valued at about $950 million when the pair took it over, meaning WH Group probably sold the stake for about the same price that it bought it at last year.
Just months before the original Campofrio purchase, WH had closed its purchase of US pork producing giant Smithfield for $4.7 billion, the biggest purchase ever of a US company by a Chinese buyer. Significantly, WH Group let Smithfield CEO Larry Pope do the talking in its announcement explaining its decision to sell Campofrio just a year after making the purchase. Pope’s language is rather round-about, but he says the move reflects WH Group’s constant review of its portfolio and a desire to strengthen its balance sheet, and generate cash to meet its longer term growth priorities.
All that talk would suggest that perhaps WH Group was a bit too eager to expand its global footprint when it purchased Campofrio. It’s hard to know what happened to make WH Group change its mind so quickly, but I expect the deal was probably engineered by the company’s China-based executives who were eager to follow Beijing’s broader directive for Chinese firms to go global. Since then it appears that WH Group has realized it may need some help to run such a global company, and is letting Smithfield executives play a bigger role in major decisions outside China.
WH Group was a local superstar when it pulled off the Smithfield buy in 2013, assembling the necessary financing and also managing to convince skeptics in Washington that the purchase didn’t pose any national security threat. But since then the company has suffered a few setbacks, most notably in its Hong Kong IPO plan that was delayed and greatly reduced due to lack of investor interest before finally launching last October.
WH’s shares skidded as much as 40 percent after the offer finally happened, but have recouped most of those losses since then and are now down just 5 percent below their IPO price. The company had initially hoped to raise $4.7 billion, with much of the funds slated to help repay its big debt from the Smithfield purchase. But it ultimately raised only half that amount due to the tepid investor reception.
WH Group made the Campofrio purchase when it still believed it could raise the bigger amount of money, and thus this decision to sell also hints that it needs the funds to make up the shortfall from its IPO plan. Spain is probably a good market over the longer term, which perhaps was why WH made the original investment. But right now the country remains mired in a long-term economic downturn, which means Campofrio probably wasn’t going to be a strong performer in WH Group’s global portfolio anytime soon.
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