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.