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.

 

The Shuanghui bid for Smithfield will cost Shuanghui about US$4.7 billion in cash for the Smithfield shares. At roughly US$6 per RMB the annual sales of Shuanghui is about US$6.5 billion. It claims on its website to have total assets of RMB20 billion, more than 60,000 employees, and an annual output of three million tonnes of meat. It is, according to its numbers, China's largest meat processing base with its headquarters in Luohe City, Henan Province. 

 

We have made our own calculations in order to put Shuanghui's operations into context and they are presented in the table here. We can see from this that Shuanghui may not have had the largest hog slaughter capacity in 2012, but its processed pigmeat sales place it (just) in front of Yu Run. Its total operating revenues are almost twice as high as Yu Run's. 

 

	2011			2012
	Operating Revenue	Slaughtering Number	Pig meat chilled & frozen	Operating Revenue	Slaughtering Number	Pig meat chilled & frozen
	(Million RMB)	('000 head)	('000 tonnes)	(Million RMB)	('000 head)	('000 tonnes)
Shuanghui	35,832	10,000	944	39,705	11,418.60	1,148
Yu Run	23,668.80	15,000	1,107	21,425	13,790	1,006
Jin Luo
Zhong Pin	9,174	5,500	444	10,165	6,600	531
Shunxin Beijing	3,506	1,800	164	3,200	1,861	167
	(Pork sales)			(Pork sales)
New Hope	22,091	3,000	175	21,870	3,200	180
Delisi	1,925	1,600	90	1,975	2,000	110
Source & Notes: Shaded cells indicate estimates by eFeedlink/Whole Hog

 

Shuanghui revenues compare 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 are 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 symbolises 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, it seems, 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 executives will reap about US$85 million from the bid if it goes through from stock and share options. Continental Grain, the largest shareholder of 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 US$9 billion-US$10.8 billion if broken up i.e. about US$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. That's the Chinese puzzle.

        

          

 

This report is also available with additional details in the June issue of Whole Hog.