China's Shuanghui International said it would buy Smithfield Foods Inc for $4.7 billion in cash to help satisfy growing demand for U.S.-made pork in its home market, but the deal may raise concerns in the United States.
The agreement, announced on Wednesday, comes after Smithfield's largest shareholder agitated for change at the Virginia-based pork producer - the world's largest - including a call to break up the company.
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The deal is subject to review by the U.S. Committee on Foreign Investment in the United States, or CFIUS, a government panel that reviews transactions that would bring U.S. businesses under foreign control, Smithfield said in a statement.
The transaction would be the largest Chinese takeover of a U.S. company, with an enterprise value of $7.1 billion, which includes the assumption of debt. The biggest Chinese cross-border deal was CNOOC Ltd's 2012 acquisition of Canada's Nexen Ltd, with an enterprise value of about $17.7 billion, according to Thomson Reuters data. (Factbox:
Relations between the United States and China over cross-border deals have become testy as of late. The issue may arise next week when U.S. President Barack Obama meets with his Chinese counterpart, Xi Jinping, in California to talk about cyber-security.
Partly to mitigate any concern over the deal, Shuanghui has promised no closures or relocations of Smithfield's operations and to keep current management, including Chief Executive Officer Larry Pope.
The thrust of the deal is to send the U.S. pork to China, a consideration that one person familiar with the matter said would help during Shuanghui's CFIUS review, which may focus on the potential for rising Asian imports into the United States.
The deal is "not a strategy to import Chinese pork into the U.S.," Pope said during a conference call with analysts. "This is a strategy to export pork out of the U.S."
He said the company had been attempting to strike a deal with Shuanghui since 2009.
"The Asian market is huge opportunity for us as a company," Pope said. "We just haven't been able to put something together until today."
China, including Hong Kong, is the third-largest market for U.S. pork behind Mexico and Japan. Last year, it imported about 431,000 metric tons worth $866 million from the United States, according U.S. government data.
Shuanghui International is the majority shareholder of Henan Shuanghui Investment & Development Co, China's largest meat processor and its largest publicly traded meat products company as measured by market capitalization.
Demand for U.S. meat in China has risen tenfold over the past decade, fueled recently by a series of embarrassing food safety scandals, from rat meat passed off as pork to thousands of pig carcasses floating on a river.
Smithfield has been working to stop using the feed additive ractopamine, which has been banned in China and Russia, an effort that enhances its appeal as an exporter.
Shuanghui offered $34 a share for Smithfield, a 31 percent premium to its closing stock price on Tuesday. The Chinese company will assume $2.4 billion of Smithfield's debt.
Smithfield shares were up 25 percent at $32.47 in morning trading on the New York Stock Exchange.
Of the 68 food companies covered by StarMIne, Smithfield is one of only three that trades at less than its book value. Its price is 0.9 of book value, compared with a peer average of 2.6.
Privately owned Shuanghui will finance the transaction through a combination of cash, rollover of existing Smithfield debt and debt financing produced by Morgan Stanley and a syndicate of banks. The boards of both companies have approved the deal.
Continental Grain Co, which with a 5.8 percent stake is Smithfield's largest shareholder, has been pushing for change at the company. Last month it sent a letter urging management to break Smithfield into three independent enterprises.
Continental said in an April presentation that Smithfield should use the proceeds from the split to buy back shares, restructure its business and pay a dividend in line with what its peers pay.
The deal would boost the supply of U.S. pork to China, where food safety and environmental pollution are chronic problems. Public anxiety over cases of fake or toxic food often spreads quickly.
In March, more than 16,000 rotting pigs were found floating in one of Shanghai's main water sources, triggering a public outcry.
Earlier this month, Chinese police broke a crime ring that passed off more than $1 million in rat and small mammal meat as mutton.
Barclays is the financial adviser to Smithfield and Simpson Thacher & Bartlett LLP and McGuireWoods LLP are legal counsel. Morgan Stanley is financial adviser to Shuanghui and Paul Hastings LLP and Troutman Sanders LLP are legal counsel.