One of the biggest pork producers in the U.S. on Wednesday agreed to be bought by the majority shareholder in China's largest meat processor for about $4.72 billion. It is the largest takeover of a U.S. company by a Chinese firm — and the latest example of China's growing appetite for U.S. investment.
The deal with Shuanghui International Holdings Ltd. still faces a federal regulatory review and Smithfield Foods Inc. shareholder approval.
And the acquisition is likely to face strong U.S. scrutiny, coming at a time of serious food safety concerns in China, some of which have included Shuanghui.
Risks to the U.S. food supply "enters everybody's mind," said Paul Mariani, director at Variant Capital Advisors in Chicago. But he said he believes Smithfield will continue to operate as normal.
Smithfield said the deal isn't about importing Chinese pork into the U.S. Instead, the company says it's a chance to export into new markets with its brands, such as Smithfield, Armour and Farmland.
Smithfield CEO Larry Pope said in a conference call Wednesday that the transaction "preserves the same old Smithfield, only with more opportunities and new markets and new frontiers."
Under the terms of the Shuanghui-Smithfield deal, which was unanimously approved by both companies' boards, shareholders of Smithfield will receive $34 per share — a 31 percent premium to the Smithfield company's closing stock price of $25.97 on Tuesday.
The companies put the deal's total value at about $7.1 billion, including debt. Smithfield's stock will no longer be publicly traded once the deal closes.
The acquisition highlights growing interest in U.S. food by Chinese consumers. Foreign food, such as milk powder from New Zealand and vegetables from neighboring Asian countries, is prized because of the frequent domestic food safety scandals in China.
In the most notorious case, six babies died and 300,000 were sickened in 2008 from drinking infant formula and other dairy tainted with the industrial chemical melamine. And Shuanghui's reputation was battered in 2011 when state broadcaster CCTV revealed that its pork contained clenbuterol — a banned chemical that makes pork leaner but can be harmful to humans.
Derek Scissors, an expert on China's economy with the Heritage Foundation, a conservative U.S.-based think tank, said companies like Shuanghui are "not looking to cause any trouble in the American market at all."
"Quite the opposite ... They want to gain from what the U.S. is able to do," Scissors said. "But whether they can operate an American company in the U.S. market remains to be determined."
The deal comes as Smithfield has been under pressure to improve its business.
The company needs to raise prices to offset rising commodity costs, namely the corn it uses for feed. But consumers are still sensitive to price changes in the current economy. By raising prices, Smithfield risks cutting into its sales should consumers cut back or buy cheaper meats, such as chicken.
In recent months, Continental Grain Co., one of Smithfield's largest shareholders, had been pushing Smithfield to consider splitting itself up, saying it was time for the company to "get serious about creating shareholder value."
Following a March letter from Continental Grain, Smithfield said it would review the suggestions "in due course." Representatives from Continental Grain did not immediately comment on the deal announced Wednesday.
In its most recent quarter, the company reported that its net income rose more than 3 percent, helped by gains in hog production, its international business and its packaged meats — a large growth area for the company.
Hong Kong-based Shuanghui owns a variety of global businesses that include food, logistics and flavoring products. Smithfield's existing management team will remain in place. The company has about 46,000 employees.
Chinese investment in U.S. companies is still comparatively low, but it has risen sharply in recent years, topping $6.5 billion in 2012 and with more than $10 billion in deals in the pipeline so far this year, according Thilo Hanemann of research firm Rhodium Group. The data reflect investments that meet the threshold for foreign direct investment, which is a final stake of 10 percent or more of voting rights in the invested company and excludes portfolio investments such as government bonds.
Much of the investments are in energy, advanced manufacturing and technology, as well as entertainment, hospitality businesses and safe-haven assets like real estate.
"It's good news for the U.S. economy and for U.S. manufacturing because Chinese companies are keen to capitalized made in the U.S. brands," Hanemann said. "The level of Chinese investment is still too low to call it a savior ... (but) the potential for future growth is huge."
