Smithfield and Shuanghui create a Chinese puzzle

The announcement of the takeover bid for Smithfield Foods by the Chinese company Shuanghui caught some observers by surprise. But the tendency for cash-rich Chinese companies and investors to purchase productive assets, brands and know-how in the west should have been expected to spread to the food and drink sector: especially when the Chinese food sector is growing at double digit rates along with the demand for “safe, quality” food products. In the June issue of Whole Hog we devote two pages to considering what, and who, is driving this deal. You can see the full text of this Blog and accompanying data on the top pork companies in China and the USA on pages 2 and 3 of that issue but here’s a flavour.

The Shuanghui bid for Smithfield will cost Shuanghui c. $4.7 billion in cash for the Smithfield shares. At roughly US$6 per RMB the annual sales of Shuanghui are c. US$6.5 billion. This number compares with the most recent sales for Smithfield of US$13.2 billion. So, Shuanghui is big, but Smithfield is bigger. Although the Shuanghui Group and Shuanghui Investment & Development (listed on the Shenzhen Stock Exchange) are established names in China the bid for Smithfield has been made by Shuanghui International Holdings. Shuanghui International Holdings is a subsidiary owned by a collection of investors including the Shuanghui Group. 40% of the shares of Shuanghui International is owned by people who work for Shuanghui, and the remaining 60% is held by investment firms including Goldman Sachs, the private equity firm CDH Investments and New Horizon, Kerry Group and Temasek. Strictly speaking, Shuanghui International Holdings is not a Chinese company, but a company financed by foreign investment firms with a Chinese name. That’s interesting and a sign that the big boys are out hunting in the jungle. This deal is unlikely to be a one-off.

Furthermore, the deal got a good reception in the Chinese media. The People’s Daily reported the news with a headline alongside the news of President Xi Jinping. The People’s daily researcher, Jinjie Zhang, wrote the deal up like this…. Shuanghui’s acquisition of Smithfield has a very profound meaning. Firstly, this acquisition symbolizes how the international investment of Chinese companies is becoming diverse. In the past, Chinese investors mainly focused on the energy and manufacturing sectors. However, this situation has been changing in recent years. In 2012, Wanda and Guangming acquisition of food companies outside China was a sign that the international investment of Chinese companies is flowing into food, entertainment and other fields. Secondly, Smithfield is the largest pork producer and supplier, as well the biggest producer of pork processing products in the USA. On the other side, Shuanghui represents the largest meat processor in China. Thirdly, Chinese food companies have been haunted by continuous questioning about their food safety. So they are willing to acquire new technologies and management systems to solve the food safety problem.

The media and politicians in the USA have, so far, not known what to make of this “merger”. The farmers have been relatively quiet and the lawmakers have made some predictable noises about foreign-ownership but nothing too strident. The analysts and investors have been more searching in their comments. Bloomberg’s reporters, Thomas Biesheuvel & Simon Casey, described Smithfield as, one of the worst-performing large US food makers over the past five years and highlighted the fact that Smithfield’s top execs will reap c. $85 million from the bid if it goes through from stock and share options. Continental Grain, the largest shareholder in Smithfield Foods, had openly called for a break up of Smithfield previously and now says it will accept the bid. Another big shareholder, Starboard Value LP, calculated that Smithfield should be valued at $9-10.8 billion if broken up i.e. c. $44-55 per share.

It seems to me that Smithfield’s management and investors are probably getting a neat way out of Smithfield’s business “challenges” with this deal. It also seems to me that it is, as yet, unclear whether Shuanghui is getting a bargain or a pig in a poke.

And that’s what I call a Chinese puzzle….

Dr John Strak, Editor Whole Hog