Smithfield-Shuanghui Deal: CFIUS, Food Quality, and More

June 2, 2013

I missed quite a few good China stories during my trip to India, but this proposed takeover of Smithfield Foods by Chinese meat powerhouse Shuanghui (also trades under the oleaginous name Shineway) is probably the most important one in the cross-border biz world. This deal will be valued at $4.7 billion, making it #1 in terms of Chinese overseas direct investment in the U.S.

Lots of issues, but we’ll stick with just a couple here. First, is this deal going to run into problems with the Committee on Stopping Foreign Investors from Competing With American Businesses Foreign Investment in the U.S., aka CFIUS? The committee, which has broad authority to review inward investment deals, mostly handles issues relating to national security or sensitive assets, like energy or telecom.

What about the nation’s food supply? Lots of folks would probably say that ensuring the integrity of the country’s food supply is certainly sensitive enough to merit scrutiny. (I could probably find some choice Chairman Mao quotes on food security if I had the time and the inclination — since I have neither, you’ll have to trust me on that one.)

But is there a sufficient threat here to the nation’s food supply to warrant CFIUS blocking the deal? I really doubt it. The deal is clearly about U.S. exports to China, with the Chinese firm securing access to high(er) quality meat that can be sent to a home market beset with food quality scandals. So in the short run, there should be no real effect on the U.S. food supply, and I would further suspect that Congress, which is a sucker for big export deals, will generally fall in line on this one. The chatter I’ve heard about food supply disruptions, use of Chinese animal husbandry methods, and food deals with the PLA sound rather far-fetched to me, and hardly sufficient to sink a big deal like this.

Then again, sometimes all it takes is one or two nutjobs in Congress, and the political winds can shift in a hurry. Perhaps one of those anti-Commie political action committees will commission a PR firm with some good Photoshop skills to produce a TV ad showing thousands of dead pigs floating down the Mississippi River, accompanied by Mickey Dolenz scat-tastic Goin’ Down — that’ll get some attention on The Hill.

Second, food safety in the long run. Will Chinese ownership have any effect on compliance at Smithfield? This is a tough question, and I won’t really hazard a guess. It will depend on what sort of restructuring will take place at Smithfield post-deal and whether the Shuanghui corporate culture will make any difference to the U.S. operation.

I suspect that one of the reasons behind this deal was that Shuanghui, and many other Chinese food companies, is in desperate need of technology and quality management (Shuanghui has had its own problems with QC). If that’s the goal, then it’s more likely that the China operations of Shuanghui will be changing more post-deal than Smithfield, as the former adopts new QM processes gleaned from the target company.

So I’m not too worried. On the other hand, I have zero faith in understaffed and underfunded U.S. regulators these days, so in the out years when Shuanghui starts looking for budget-cutting opportunities over at Smithfield, well, who knows what will happen 5 or 10 years from now with U.S. compliance programs? Hmm.

Third, what will be the reaction to the deal by American consumers? It’s possible that some shoppers will think twice before grabbing that familiar pork product once they know it was produced by a Chinese company. I kinda doubt it, though. Most Americans have no idea who owns the brand they shop for. Moreover, we’re talking about products like hot dogs. Does the following seem like something an average shopper would say?

Gee, that package of processed amalgam of salt, nitrites, and animal lips and sphincters looks mighty tasty, but I heard that it’s made by the Chinese. Lord knows what they might put in it!

Final note: I was interested to see this in a New York Times writeup of the deal:

Smithfield was advised by Barclays and the law firms Simpson Thacher & Bartlett and McGuireWoods. Shuanghui was advised by Morgan Stanley and the law firms Paul Hastings and Troutman Sanders.

Chinese outward investment — every international law firm’s wet dream. Looks like some firms are finally starting to get some work. Congrats, guys.

10 thoughts on “Smithfield-Shuanghui Deal: CFIUS, Food Quality, and More

  1. Chris Devonshire-Ellis

    Hi Stan; my view is that there have been far too many “auto-pilot” negative assumptions about deals like this. The US in fact has long been the largest supplier of pork to China as this Canadian report shows: http://www.gov.mb.ca/agriculture/statistics/agri-food/china_pork_trade_en.pdf
    It’s the US supplying China, not the other way around. Therefore, it makes complete commercial sense for the Chinese to buy their largest supplier rather than continue to pay their profit margins.

    Plus there’s an added bonus – given that American food processing technology is better than China’s, the Chinese get access to that to improve their own domestic products.

    I look at it instead as part a technology acquisition to improve the Chinese consumer market (where pork anyway is butchered completely differently and uses totally different recipes than in the US) as well as a financially sensible commercial decision.

    It will not have any impact (as opinionated blogs elsewhere have naively suggested) on a decline in American pork products sold in the United States. Such talk is both ill-informed, not backed up by the Chinese being America’s largest pork client historically and lacks any Sino-US M&A commercial deal-making sense.

    Instead, my perspective is that American Pork will continue to be as it was and the Chinese domestic productions for their own market will improve as a result of improved food processing technology. I’d suggest that’s a win-win deal. – Chris

    1. Stan Post author

      I think it will be a win-win as well, at least in the short/medium term. The question is whether the usual clowns in DC will use this opportunity to push back against another Chinese inward investment deal. You never know. “Win-win” is not a persuasive argument to those guys.

      1. D

        I grew up across the river from Smithfield — every time we drove across the James River, we would say “the smell of death is in the air” as you could smell swine for miles. Smithfield Hams are an important American brand, especially in the American South; and I am sure no matter what clear-headed pundits say about how good it is for both companies, many Americans will stop eating Smithfield because of the China connection — this has poisoned their brand in some circles in the US.

  2. Chris Devonshire-Ellis

    Yup that’s true, some of those guys are straight out of the McCarthy era. However, I don’t believe the deal in any way compromises American helath standards – the trade issue is the other way around – and commercially it makes complete sense. However whether the “commies under the bed” brigade agree is another matter. Cheers – CDE

  3. Marius Van Andel

    An investment of this magnitude is not about technology transfer. It is about diversification and, more importantly for the buyer, control! Technology transfer can be had in many other ways, both less risky and less involved.

    1. KSChin

      I am not sure how much technology there is to transfer here. Making ham? Wont they better off buying a company in Italy or Spain? I think its more of management skills including quality control, efficiency and productivity. Smithfield obviously have more experience with large scale production. Shuanghui is struggling with the same issues. If Shuanghui wants to export their terrible pork management practices, they need to buy up Smithfield? I would have thought with everyone very concerned on some of the backward practices in China, any improvement should be encouraged.

  4. Steve Ng

    @Mariius – Why they bought the company would have been a commercial decision and I agree with Chris the technology would likely have been part of that need for the Chinese. I deal with a lot of China M&A through Hong Kong and the size of the deal is irrelevant, they’ll have paid an agreed premium on total assets of which the TT would normally be an identfiable component. However important that was to Shuanghui would have been between them and Smithfield and how the deal was negotiated.

  5. L Metaal

    I would not praise Smithfield for its great managerial and technological assets. They run the worlds worst hog farms, have a bad track record for environment, labour and hygiene. The only thing might be their SAP integration of supply chains but it is not that their pork is so wonderful or revolutionary. It’s not an agricultural product anymore, It’s industrial meat. http://avaazimages.s3.amazonaws.com/SmithfieldJan08.pdf might be an interesting read. It’s just a business decision to secure their current supply at better margins and Smithfield’s large shareholders are pocketing a ton of money in the process, no more….no less

  6. bystander

    There’s also the really simple point that the Chinese company will now own a profitable American company that has a big presence in the American market. That is, even apart from considerations of tech transfer (Smithfield can share its special method for grinding up lips and sphincters with the Chinese haha), the fact remains that Smithfield is a good American company with a good brand name and probably a good balance sheet and income statement.

  7. Ande

    One other issue is about getting approved. I guess the idea is to sell pork from the US to China. A deal this size could prove to be a door opener into China for American pork.