‘A new era’

The proposed sale of Smithfield Foods to a Chinese food company sent reverberations throughout the country — especially in its hometown of Smithfield, whose slogan is “Hams, History, and Hospitality.”

“The week that this was announced, you could have heard a pin drop on Main Street in Smithfield,” says Lisa Perry, economic development director of Isle of Wight County, where the town is located. “As a citizen, it’s bittersweet for me, and it’s bittersweet for our community.”

But from a business perspective, Perry is focusing on the opportunities the deal presents. An acquisition of this magnitude, she points out, says a lot about the business potential of the town and county where Smithfield Foods grew from a small packing plant in 1936 into the world’s largest pork producer and processor.  “I think the fact that we have this homegrown company that could become the largest Chinese acquisition in the United States is an unbelievable story.”

Smithfield Foods and suitor Shuanghui International Holdings Ltd., which owns the largest meat products company in China, have said the Virginia company’s operations will remain much the same under the deal. No facilities will be closed. Employees will keep their jobs. Smithfield management will stay in place. Shuanghui will maintain Smithfield’s labor agreements with unions. 

The major change? Smithfield executives say the $4.7 billion deal will bust open the export market to Chinese consumers who want more pork than their country can produce. For Shuanghui, the deal will provide access to Smithfield production technology and processes, which can be used at its operations in China.

“We will continue to provide our customers and consumers with the same high-quality delicious pork products that they have come to expect from Smithfield for more than 80 years,” Smithfield President and CEO C. Larry Pope said during a conference call with investors. “This transaction preserves the same old Smithfield, only with more opportunities in new markets and new frontiers.”

The deal, however, hasn’t received a warm reception from everyone. Some politicians, concerned over food safety, have voiced their opposition.

Iowa Republican Sen. Chuck Grassley released a statement saying the deal threatens food safety and small farmers’ ability to compete. “No one can deny the unsafe tactics used by some Chinese food companies,” he said. “And, to have a Chinese food company controlling a major U.S. meat supplier, without shareholder accountability, is a bit concerning.”

The plan
If approved, the proposal would make Smithfield the largest American acquisition by a Chinese company. The agreement gives Shuanghui more pork and provides Smithfield with access to an immense market of Chinese consumers.

The deal also would allow Shuanghui to use Smithfield’s production technology and best practices. That access is potentially the most important part of the agreement, says Bob Trumble, professor of management at the Virginia Commonwealth University School of Business.  “On the other hand, [Shuanghui] would like to buy a very good company, and it would like to buy a company that is technologically very savvy,” says Trumble. “And by buying Smithfield, they’ll get both.”

Shuanghui has agreed to pay $4.7 billion in cash for Smithfield, valuing the company at $7.1 billion with the assumption of its debt. That would give Smithfield shareholders $34 per share, a 31 percent increase over its closing stock price the day before the agreement was announced. Smithfield would operate as a wholly owned subsidiary of Shuanghui.

“We want you to keep doing what you do now,” Yang Zhijun, managing director of Shuanghui, said during an online employee town hall after the announcement. “We do not want to change anything. We want to learn from you. Together, we can be the global leader in pork.”

While implementing Smithfield’s practices in China, Shuanghui will continue to need exports in the future, says Trumble. “The [company] will move this technology and try to take care of China’s needs better. But the Chinese needs are so great, and the Asian needs are so great, as they are moving their diet to increasingly include meat. That need far exceeds what Smithfield can put out.”

Smithfield had been in discussions with Shuanghui since 2009, according to Pope, but the companies could not agree on a price point until now.

Kelly O’Keefe, professor of creative brand management at VCU’s Brandcenter, says the acquisition likely would not affect Smithfield products’ sales here. “Most consumers aren’t going to be aware of this acquisition,” he said. One caveat, he says, could be if another Chinese food scandal broke out, and news reports mentioned Smithfield’s Chinese parent company.

The transaction is scheduled to close in the second half of 2013, but it certainly faces scrutiny. The deal is subject to approval from Smithfield shareholders, compliance with antitrust laws and review by the U.S. Committee on Foreign Investment in the United States (CFIUS).

The obstacles
Smithfield voluntarily filed for review with CFIUS but says it expects the deal to be approved. In 1988, Congress passed a law allowing the president to prohibit acquisitions of American companies by foreign firms that threatened national security. The secretive committee was formed to advise presidents on whether a potential deal poses a risk.

In the past, concerns from the committee have been enough to persuade foreign companies to drop their bids.  In 2011, China’s Huawei withdrew its acquisition proposal for 3Leaf Systems because of committee sentiment.

What may be most difficult for the Shuanghui-Smithfield deal is political pressure. CNOOC’s bid for the oil company Unocal in 2005 was retracted before the committee finished its review. Dubai Ports World’s attempt to buy an operator of American ports in 2006 passed review by the committee but collapsed amid political pressure.

Politicians who have spoken out against the Smithfield deal include Rep. Randy Forbes, R-4th, whose district includes the town of Smithfield, and Sen. Debbie Stabenow, D-Mich., who chairs the Senate Agriculture Committee.

The companies’ biggest battle may be overcoming the stigma of food safety scandals in China. In March, thousands of pig carcasses were found floating in the tributaries of the Huangpu River, which supplies drinking water to Shanghai. Chinese police also have been trying to crack down on illegal meat sales that have brought tainted pork into the marketplace. 

Shuanghui has had trouble of its own. In 2011, a Chinese television station said the illegal additive clenbuterol had been found in its products. The company apologized and recalled some of its products in the wake of the scandal.

The Shuanghui-Smithfield deal will not include any U.S. imports of Chinese pork, according to a company filing with the U.S. Securities and Exchange Commission discussing food safety. The memo also notes that Shuanghui is “committed to learning from and instituting Smithfield’s industry-leading technologies and standards, and raising food safety standards globally.”

As the proposed deal makes its way through the regulatory and political obstacles, Perry ponders its potential for the community. “This is an opportunity that can help transform our community in ways that we don’t know yet. I think it’s exciting,” she says. Perry wonders: What opportunities exist to welcome Chinese visitors? Could there be more cultural or education exchanges?

“It’s bittersweet, [but] it’s part of letting go of the past and embracing the future. We have such pride here in our community for Smithfield Foods, and it’s amazing what they’ve accomplished,” she says. “You can’t help but be dazzled by what they’ve done. It’s a new era.”