Shuanghui Gobbles Up US Pork Giant Smithfield
China’s appetite for foreign food M&A is gaining momentum with news that meat processor Shuanghui International has offered to buy US pork products maker Smithfield Foods (NYSE: SFD) for $4.7 billion. The deal would be the biggest purchase ever of a foreign food maker by a Chinese firm, following a recent spate of smaller but still major deals by names like Bright Food (Shanghai: 600597). But the deal drew controversy almost as soon as it was announced, with at least one US politician and an industry group voicing their concerns about the transaction. I personally have no objections to these deals on a purely trade basis, though I have expressed some concerns for other reasons. The biggest of those stems from the lax quality control and other unsafe practices at many Chinese food companies, which has resulted in a non-stop series of scandals dating back for the last 5 years. My worry is that these Chinese buyers could quietly encourage some of those bad business practices at the overseas businesses they buy, posing a potential danger to local consumers and also damaging the reputations of these well-known brands.
The newly announced deal would see Shuanghui, the majority shareholder of China’s largest meat processor Shuanghui Industry and Development Co (Shenzhen: 000895), buy Smithfield for $34 per share, a 31 percent premium over Smithfield’s last closing price. (English article) Chinese article) Smithfield shares jumped 28 percent to $33.35, or just 2 percent below the offer price, indicating investors think there’s a good chance this deal will be completed.
Sources said that Smithfield was in talks with 2 other potential bidders, one from Thailand and one from Brazil, before this current offer was announced. That could explain the investor confidence that a deal will ultimately be completed, since there are 3 interested parties, and perhaps we’ll even see a bidding war break out.
Founded in 1936, Smithfield is one of the oldest and best known US brands for pork products, and I personally can recall seeing plenty of ads for Smithfield hams and bacon when I was growing up. Perhaps that explains the somewhat ominous comments from Democratic US Congresswoman Rose DeLauro immediately after the deal was announced, saying she had concerns about whether the sale would be in the best interest of US consumers.
Organized labor was also somewhat worried about the potential for the loss of US jobs. The United Food and Commercial Workers International Union, which represents more than 16,000 Smithfield workers, issued a statement saying it would watch the sale process closely to make sure its members’ rights are protected. (union announcement) I was actually somewhat surprised at the relatively upbeat tone of the union’s announcement, which seemed to express some cautious optimism about the deal.
That kind of guarded optimism has been present in many of the recent Chinese acquisitions of foreign food makers, based on the hope that these western brands can work with their new owners to tap the China market. Bright Food is already trying to bring breakfast cereal to China with its purchase of British cereal giant Weetabix for more than $1 billion last year. (previous post) Several Chinese dairies have also purchased overseas assets to import their products, which are generally preferred by Chinese consumers wary of domestic brands.
Based on the initial reactions, I would expect this deal to face some minor resistance but ultimately close unless a bidding war breaks out. Shuanghui has already said it would keep Smithfield’s current management in place and leave most of its operations intact, which looks smart from a political and practical perspective.
Smithfield’s current management may not be perfect, but it’s probably far more experienced and quality-conscious than Shuanghui’s. I would expect some inevitable culture clashes if the deal does go forward, especially as the Chinese have to deal with tough US labor unions. But perhaps Smithfield’s managers could ultimately teach their new owners a few new tricks to help them improve their operations and regain the trust of Chinese consumers.
Bottom line: Shuanghui’s purchase of Smithfield is likely to close, with more similar deals to follow as Chinese food firms seek global assets.
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This article was first published in the online edition of the South China Morning Post at www.scmp.com.
