* 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
* Goldman arm, CDH have stakes in Shuanghui offshore
By Denny Thomas and Olivia Oran
HONG KONG/NEW YORK, May 30 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
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.
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
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."
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.
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.
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.