Shuanghui Acquisition Breaks Global Ground for Chinese Enterprises

By staff reporter JIAO FENG

SHUANGHUI International Holdings Limited announced on October 10 that it had acquired U.S. pork producer Smithfield Foods for US $7.1 billion. Wan Long, Shuanghui International chairman, also board chairman of Shuanghui Group, spoke at a press conference in Hong Kong that day of a detailed strategic growth plan to increase Smithfield’s exports from the U.S. to Asia, so providing the Chinese market with high-end meat products; also of the two companies’ establishment of a new global trade platform.

The biggest-ever acquisition by a Chinese firm of a U.S. company, the deal lays open to Chinese enterprises a new global investment pattern of “capital outflow, product inflow” that could benefit both sides. It hence accounts for the high percentage approval by Smithfield Foods’ shareholders of the Shuanghui acquisition.

Snake Eats Elephant?

Smithfield Foods shareholders voted on September 24 in favor of the proposed takeover by Shuanghui International. More than 96 percent of the votes cast at a special shareholder meeting approved the transaction, which represents 76 percent of Smithfields’ total outstanding common shares. The deal had already received the go-ahead of the U.S. Committee on Foreign Investment (CFIUS). Its closure makes Smithfield a wholly-owned subsidiary of Shuanghui.

Under the terms of the deal, Smithfield shareholders received a US $34 per share of Smithfield common stock, representing a premium of around 31 percent over Smithfield’s closing stock price on May 28 of 2013. Smithfield delisted its stocks from the New York Stock Exchange as of September 26. Shuanghui International paid US $4.7 billion for the sale and US $2.4 billion for debt assumption. This took the total cost of the transaction to US $7.1 billion.

Smithfield Foods is the world’s largest pork producer and provider and one of the U.S.’s largest providers of pork products. Shuanghui International is the majority shareholder of Henan Shuanghui Investment & Development Co., Ltd., China’s largest meat processing company and largest publicly traded meat products enterprise. Statistics show that in 2012, Smithfield’s pork production stood at 3.64 million tons and generated US $13.1 billion in sales revenue. The same year, Shuanghui produced 1.71 million tons of pork, with sales revenue of US $6.49 billion. Certain commentators compared the deal to a snake eating an elephant.

“Although Shuanghui may appear weaker than Smithfield in terms of production and annual revenue, in 2012 it generated net profits of US $470 million, a year-on-year rise of 116 percent. Smithfield’s net profits in 2012 of US $360 million, meanwhile, were lower by 31 percent than the previous year,” Dean of Minsheng Securities Research Institute Li Feng said. He went on, “As regards industry prospects, pork is a dining staple in China, and its consumption there has risen steadily. But in the U.S., where beef is more popular, there has been a gradual fall in pork consumption. Shuanghui moreover includes other shareholders of international capital, such as Goldman Sachs Group, CDH Investments and Temasek Holdings Pte. Ltd. The acquisition so promotes an association among strong companies.”

Win-win Cooperation

Closure of the deal has made Shuang-hui the world’s largest pork producer and provider. “Shuanghui will not go to the U.S. to establish new plants, and nor will Smithfield come to China to set up a factory. But Shuanghui is considering introducing Smithfield’s brands and products into China’s market,” Wan Long said. “After the merger, our company will assemble the most advanced technology, unmatched resources and outstanding talents in the pork industry. Shuanghui and Smithfield will thus complement one another’s advantages and form the world’s largest pork enterprise providing quality meat products.”

Shuanghui International guarantees that Smithfield will remain a separate company with its own operation, management team, brand and headquarters. Shuanghui also promises there will be no layoffs or factory closures. The company will carry on its cooperation with U.S. producers, suppliers and farms, and American consumers will continue to enjoy Smithfield’s quality pork products.

“This is a great transaction for all Smithfield stakeholders, as well as for American farmers and U.S. agriculture,” Smithfield Foods CEO Larry Pope said. “We do not anticipate any changes in how we do business operationally in the United States and throughout the world. We will become part of an enterprise that shares our belief in global opportunities and our commitment to the highest standards of product safety and quality. With our shared expertise and leadership, we look forward to accelerating a global expansion strategy as part of Shuanghui.”

China leads the world in pork production and consumption, its annual pork consumption standing at 50 million tons, so accounting for half of global consumption. Challenges in recent years with regards to food security and environment, however, have resulted in growing pressure on pork supply. Since 2008, China has become a net importer of pork. The U.S. pork market, meanwhile, is almost saturated. Data show a drop in American pork consumption over four consecutive years – a decline that has had clear impact on Smithfield’s growth and business.

“Expanding exports to China is key to Smithfield’s growth. Smithfield pork exports to China previously represented one fourth of the company’s output. Having become a Shuanghui subsidiary, Smithfield can now utilize its sales channels to expand Smithfield’s share in the Chinese market and expand pork exports. Shuanghui, in turn, gets high-quality, competitively-priced U.S. pork products,” Li Feng said.

The incomplete industry chain and low-end market trap have created a dilemma for Shuanghui. Since the ractopamine scandal in 2011, Shuanghui has set out to gain control over its pork resources. The company has purchased several local breeding farms and slaughterhouses in a bid to guarantee food safety at source. “Shuanghui still has a long way to go to achieve control over the entire industry chain,” Li Feng said. “But Smithfield is the world’s largest pork provider. The deal will enable Shuanghui’s access to overseas pork resources, so alleviating pressure on raw material supply. Shuanghui will also benefit from advanced technology to develop high-end products that target China’s high-end market.”

More Rational, Mature Chinese Enterprises

With deepening globalization, Chinese enterprises’ outbound investment has steadily risen. In 2012, Chinese investors made direct foreign investment in 4,425 enterprises in 141 countries and regions, with cumulative non-financial investment totaling US $77.22 billion. Overseas mergers and acquisitions constitute a main route for Chinese enterprises to go global, as typified by the Shuanghui and Smithfield deal.

There are specific phases in Chinese enterprises’ overseas acquisition. The first is that of expanding the overseas market by merging with foreign companies. Chinese enterprises thus open up the international market by pairing overseas sales channels with the advantages of China’s low production costs. The second stage is seeking out resources. Some Chinese enterprises obtain energy or mineral resources through acquisition. The Shuanghui case, however, is different. By obtaining foreign brands, products, technology and management experience, Shuanghui’s ultimate goal is to cultivate the domestic market. “The goal is not to sell the pork produced in China to the U.S. market. Shuanghui, on the contrary, wants to sell more U.S. produced pork on the Chinese market,” Li Feng said. “As the world’s most populous country, China is a huge market. Alongside economic development, Chinese consumers also expect better quality goods. It should be the trend for Chinese enterprises to expand their share in the domestic market by obtaining, through acquisition, foreign companies’ resources, brands, products and management expertise,” he added.

In contrast to their initial embarrassing frustration and losses of about 10 years ago, Chinese enterprises nowadays are relatively canny and judicious in overseas acquisitions. In 2012, the Chinese Weichai Group completed acquisition of Ferretti, the Italy-based world’s largest luxury yacht maker. Weichai now owns 75 percent of Ferretti. The same year, the Dalian Wanda Group acquired AMC Entertainment Holdings Inc, the U.S.’s second largest movie theater chain, so becoming the world’s largest cinema chain operator. Although Shuanghui encountered doubts and queries from relevant U.S. government departments, it completed the deal in only four months. “It is worth mentioning that Smithfield is not indebted, and still earns a profit, albeit one that has declined over the past few years. This signifies that Chinese enterprises are seeking out valuable acquisitions rather than just buying cheap companies. They are thus becoming more rational and mature, as well as conversant with international regulations. This will smooth the way for Chinese enterprises to go global,” Li Feng said.