China Inc's Smithfield bid expected to pass Washington test
Washington may still be digesting news of China Inc's latest bold move into America with the nearly $5 billion takeover of Smithfield Foods Inc , but early indications are the deal will not inflame enough nationalistic opposition to kill it, and success could pave the way for more Chinese purchases.
Shuanghui International Holdings' agreement to buy Smithfield would be the largest ever acquisition of a U.S. company by a Chinese one. The bid - an effort to feed a growing Chinese appetite for U.S. pork - has stirred some concern among U.S. politicians and will face review by a Treasury committee.
To many dealmakers and executives, that review is procedural and should not set off alarms.
"I don't think the Smithfield deal will have problems," said David Marchick, who leads private equity firm Carlyle Group LP's government, public and regulatory affairs and was not involved in the deal. "It's not a sensitive sector. They are keeping American management. And the U.S. agricultural community would love to export more to China."
Carlyle, which has done several deals involving China, did not encounter any problems last year when it sold one of its portfolio companies, U.S. movie theater operator AMC Entertainment, to Chinese conglomerate Dalian Wanda Group, Marchick said. The $2.6 billion deal was the fifth largest M&A transaction by a Chinese company in the United States, according to Thomson Reuters data.
"Most Chinese acquisitions in the U.S. will not encounter regulatory or political challenges. Three or four deals a year do encounter problems - and garner all the attention," said Marchick, who has co-authored a book on U.S. national security and foreign direct investment.
The Smithfield deal could certainly still face opposition on Capitol Hill. Congress is out of session right now, and foreign policy hawks such as Senator Charles Schumer of New York and Senator John McCain of Arizona have yet to weigh in. Last week both Senators expressed concerns about the takeover of Sprint Nextel Corp by Japan's SoftBank Corp <9984.T>, due mainly to security concerns related to telecom equipment from China.
Chinese companies have become more comfortable looking to do deals in the United States, in spite of the 2005 rejection of China National Offshore Oil Corp's <0883.HK> $18.5 billion attempt to buy U.S. energy company Unocal. CNOOC's bid was thwarted by fierce political opposition because of national security concerns.
With over $10.5 billion of deals by Chinese companies in the United States so far, 2013 is on pace to be the largest year ever for inbound M&A by Chinese companies, according to Thomson Reuters data. There were $11.5 billion worth of deals by Chinese companies in the United States in 2012, which was itself a significantly higher figure than in any year other than 2007.
"I do think it's helpful to get a large transaction with a Chinese buyer through," said Adel Aslani-Far, global co-chair of the M&A practice at Latham & Watkins. "It's a shot in the arm to the deal economy and to attitudes about Chinese deals. Something sizable like this could be a very good sign to the market that the conditions are right here and will encourage further Chinese investment into the U.S."
Smithfield shares were trading at around $32.94 on Friday, 3.1 percent below the $34 a share offered by Shuanghui.
NATIONAL SECURITY QUESTIONS
Shuanghui's acquisition of Virginia-based Smithfield Foods will face scrutiny by the Treasury's Committee on Foreign Investment in the United States, known as CFIUS. Congress has no authority to block the deal but can exert political pressure.
The Smithfield deal has generated limited response from Congress so far with only a handful of lawmakers - notably Charles Grassley, Republican Senator from Iowa, the largest U.S. hog producing state - expressing doubts.
"No one can deny the unsafe tactics used by some Chinese food companies. And, to have a Chinese food company controlling a major U.S. meat supplier, without shareholder accountability, is a bit concerning," Grassley said in a statement.
Some China skeptics, including Democratic Senator Sherrod Brown of Ohio, have supported the deal in principal, and Randy Forbes, the Republican who represents Smithfield's Congressional district in Virginia, was measured in his response.
Forbes said the potential takeover "warrants robust analysis and review to ensure the safety and security of America's citizens as well as the preservation of national economic interests, food safety, and environmental standards. I look forward to following that review process closely."
Mark McMinimy, a policy analyst with Guggenheim Securities in Washington, said the deal "is not likely to face serious U.S. government-related roadblocks," and also is not likely to run into resistance when it is reviewed by CFIUS.
The interagency government panel reviews transactions that would bring U.S. businesses under foreign-owned control and is comprised of the heads of a number of departments, including Treasury, State, Justice, Commerce and Homeland Security. Its deliberations are tightly guarded.
"CFIUS's scrutiny of this acquisition is vitally important. How might this deal impact our national security? What role does the Chinese government play in Shuanghui, like it does in so many other ���private' companies? These are important questions for CFIUS to get answered," Grassley said.
Aaron Schock, an Illinois Republican and a member of the House subcommittee on trade whose district includes several hog farms, raised concerns about food safety. "We have to be cautious that a Chinese-run firm wouldn't result in Chinese standards here in the U.S.," he said. "The safety of the consumer is the utmost concern and if that can't be dealt with, then this deal might be for naught."
The National Farmers Union, which mostly represents family farms and co-ops, said it opposed the deal out of concerns about concentration in the agricultural markets. "Now, in one fell swoop, 26 percent of U.S. pork processing and 15 percent of domestic hog production will be controlled by a foreign company," it said in a statement.
Given that the company is not focused on defense, energy, or infrastructure, approval seems likely, according to Charles Skuba, a business professor at Georgetown University.
Shuanghui has promised not to close or move any of Smithfield's operations and will keep current management, including CEO Larry Pope, in place.
"We may have some CFIUS concerns in relation to exactly what land Smithfield owns and what its proximity is to sensitive national security installations. But for the most part, I think they can work around that," said Skuba.
Paul Marquardt, a partner at Cleary Gottlieb who works on cross-border deals, said that CFIUS review is a concern for Chinese companies looking to expand in the United States since they often say they find the process opaque and unfair.
"I think a successful deal will help convince Chinese firms that they can get a fair shake in the U.S. They need to see that just because a deal is Chinese doesn't mean it will be blocked," Marquardt said.
(Reporting By Michael Erman, Olivia Oran and Greg Roumeliotis in New York; Additional reporting by Ernest Scheyder in New York and Ros Krasny in Washington; Editing by Edward Tobin and Claudia Parsons)