UPDATE 5-China's appetite for pork spurs $4.7 bln Smithfield buy

Thu May 30, 2013 1:15am EDT

* Deal is biggest Chinese acquisition of a U.S. company

* Smithfield shares trade close to $34/shr offer price

* Shuanghui unit shares jump as much as 10 pct

* Bullish bets placed on Smithfield options before announcement

* Goldman arm, CDH have stakes in Shuanghui offshore affiliate

By Denny Thomas and Olivia Oran

HONG KONG/NEW YORK, May 30 (Reuters) - Shuanghui International Holdings is buying Smithfield Foods Inc, the world's biggest hog producer, for $4.7 billion to feed a growing Chinese appetite for U.S. pork, in a deal that has stirred concern among U.S. politicians.

Announced on Wednesday, the takeover would be China's biggest of a U.S. company, with an enterprise value of $7.1 billion, including debt, and follows a call by Smithfield's largest shareholder, Continental Grain Co, to break up the company. Continental could not be reached for comment on Shuanghui's proposal.

The deal highlights China's growing appetite for protein-rich food, particularly pork, as its middle class expands, making China more reliant on foreign producers.

"I think this is a move by China to make sure their population is going to get fed in a cheaper manner. It's the right move for them," said Brian Bradshaw, a pig producer with operations in Illinois and Indiana, who has sold hogs to Smithfield. "Time will tell whether it's the right move for the rest of the pork industry."

The deal will face scrutiny by the Committee on Foreign Investment in the United States (CFIUS), a government panel that assesses national security risks. At least one member of Congress said the deal raised alarms about food safety, noting Shuanghui was forced to recall tainted pork in the past.

"I have deep doubts about whether this merger best serves American consumers, and urge federal regulators to put their concerns first," U.S. Representative Rose DeLauro, a Democrat from Connecticut, said in a statement.

COMPLEX STRUCTURE

Shuanghui, which controls Henan Shuanghui Investment & Development Co, China's largest meat processor, would be joining forces with a company that has a global herd of 1.09 million sows, according to Successful Farming magazine, and which raises close to 16 million hogs a year.

The U.S. firm, which also brings its grocery brands such as Armour, Eckrich and Farmland, earned 11 percent of its $13.1 billion revenue in the year to April 2012 outside the United States, including in China.

Goldman Sachs' main investing arm owns a 5.2 percent stake in an offshore affiliate of Shuanghui International, public filings show. Funds associated with China-focused private equity firm CDH own 33.7 percent of the same offshore affiliate, and Singapore state investor Temasek owns 2.8 percent.

Shares in Henan Shuanghui jumped as much as 10 percent in trading on the Shenzhen stock market on Thursday. Shares in Smithfield, founded in 1936 as a single meat-packing plant in Smithfield, Virginia, rose to as high as $33.96 on Wednesday, close to Shuanghui's $34 offer price. Shuanghui is offering a 31 percent premium to Smithfield's Tuesday closing price, and would take on $2.4 billion of Smithfield debt.

Smithfield options also jumped ahead of the offer, raising concerns that the news may have reached some investors ahead of time.

The deal will help Smithfield sell its products to a growing Chinese middle-class through Shuanghui's distribution network, while Shuanghui gains access to high-quality and safe U.S. products, said company chairman Wan Long.

"They're a major processor who want to source consistent, large volumes of raw material. You want to look at all sources of potential supply. You want to look at the cheapest sources and in the U.S, we're very competitive," said Joel Haggard, Senior Vice President for Asia Pacific at the U.S. Meat Export Federation in Hong Kong.

Average live hog prices in China, at about $2.08 per kilogram, are currently around a third higher than in the United States, Haggard said.

Shuanghui has promised not to close or move any of Smithfield's operations and will keep current management, including CEO Larry Pope, in place.

In Smithfield town, which the local visitors bureau describes as rich in "hams, history and hospitality," officials said they were shocked by the news. "It was a total shock to us," said Mayor T. Carter Williams. "Right now, I don't think anybody here knows what's going to happen ... the people in China say nothing is going to change. We would hope so."

On a conference call with analysts, Pope said Smithfield had been trying to strike a deal with Shuanghui since 2009, long before Continental agitated for change at the company. "The Asian market is a huge opportunity for us," he said. "We just haven't been able to put something together until today."

TENSE RELATIONS

The deal is the biggest Chinese play for a U.S. company since state-controlled energy firm CNOOC Ltd offered to buy Unocal for about $18 billion in 2005. It later withdrew its bid under U.S. political pressure.

The CFIUS review process comes at a time of sour relations between the United States and China over cross-border deals.

A $20.1 billion bid by Japan's SoftBank Corp to control U.S. wireless carrier Sprint Nextel Corp has fanned fears of Chinese cyber-attacks against the United States. SoftBank uses equipment made by China's Huawei Technologies Co Ltd and ZTE Corp .

Last year, the House Intelligence Committee urged U.S. telecoms firms to steer clear of those firms, saying potential Chinese state influence posed a threat to U.S. security.

FOOD SCANDALS

Demand for U.S. meat in China has risen 10-fold over the past decade, fuelled in part by a series of food safety scandals - from rat meat passed off as pork to thousands of pig carcasses floating down a river. Public anxiety over cases of fake or toxic food often spreads quickly.

Shuanghui itself was forced to recall its Shineway brand meat products from store shelves two years ago amid fears that some of it contained a banned feed additive called clenbuterol.

In that respect, the Smithfield deal may help quell Chinese concerns over the use of ractopamine, a similar additive commonly used by U.S. hog producers to bulk up animals with muscle instead of fat, without increasing the amount of feed. Smithfield has been trying to stop using ractopamine, which is banned in China and Russia - an effort that could enhance its appeal as an exporter.

THAI INTEREST

Shuanghui will pay for the deal through a combination of cash, the rollover of existing Smithfield debt and debt financing produced by Morgan Stanley and a syndicate of banks. Both boards have approved the deal.

Smithfield will pay Shuanghui a $175 million termination fee if the U.S. firm finds an alternative buyer, while the Chinese firm would pay a reverse break-fee of $275 million if the deal falls through under certain circumstances.

Thailand's Charoen Pokphand Foods, controlled by billionaire Dhanin Chearavanont, said it had considered bidding for Smithfield Foods, but declined to say more due to a non-disclosure agreement. The Thai company had talked to banks and financial advisers about making a bid, said a person familiar with the matter. Another person said Smithfield was in talks with two parties about a potential bid before the Chinese offer was announced. Smithfield has 30 days to continue talks with the interested parties, but cannot solicit bids from others, the second person said.

Barclays is the financial adviser to Smithfield and Simpson Thacher & Bartlett LLP and McGuireWoods LLP are legal counsel. Morgan Stanley is financial adviser to Shuanghui and Paul Hastings LLP and Troutman Sanders LLP are legal counsel.

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