By Michael Erman, Olivia Oran and Greg Roumeliotis
May 31 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
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, 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 $18.5 billion
attempt to buy U.S. energy company Unocal. CNOOC's bid was
thwarted by fierce political opposition because of national
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,"