CHICAGO - Shuanghui International Holdings Ltd., China’s biggest pork producer, has agreed to acquire Smithfield Foods Inc. for about $4.72 billion to increase supplies for the nation that’s the biggest consumer of the meat.
Closely held Shuanghui, parent of Henan Shuanghui Investment & Development Co., will pay $34 a share for the Smithfield, Va.-based producer, the companies said Wednesday in a statement. The offer is 31 percent more than Tuesday’s closing share price of $25.97.
Shuanghui, also known as Shineway, is owned in part by an investment firm run by Goldman Sachs. It has about $1.6 billion of assets and factories across China, as well as operations in Japan and Korea, according to the company’s website.
China’s consumption of pork is rising with the expansion of its middle class while questions are being asked about the safety of the country’s food supply. Smithfield’s livestock unit is the world’s largest hog producer, raising about 15.8 million a year, according to the company’s website. It owns 460 farms and has contracts with 2,100 others across 12 U.S. states.
“China is a large and growing market,” Smithfield Chief Executive Officer C. Larry Pope said in a conference call. “Asia as a whole is a tremendous and growing export opportunity for Smithfield.”
Valued at $7.1 billion including debt, the deal would be the largest for a meat producer and the biggest Chinese takeover of a U.S. company, according to data compiled by Bloomberg. It’s subject to approval from Smithfield shareholders and regulators including the Committee on Foreign Investment in the United States, and is expected to close in the second half of the year.
“On the one hand, pork is not directly an issue of national security, as defense or telecom might be,” said Ken Goldman, a New York-based analyst for JPMorgan Chase.
“On the other hand, if [the Committee on Foreign Investment in the United States] comes to believe that Chinese ownership of the U.S.’s largest hog farmer and pork supplier presents a food-supply risk, then it may have a heightened concern,” he said.
The merger agreement has a limited “go-shop” clause, Pope said in a phone interview. He will continue as CEO and president of Smithfield.
While the Shuanghui deal doesn’t pose a national security risk, the Committee on Foreign Investment in the United States will give it a “good study,” he said. The takeover will open up new Asian markets for Smithfield’s pork products and help the company’s new owners learn about safe ways to raise livestock and produce meat, Pope said.
Smithfield has underperformed some of its biggest U.S. rivals because its farms have seen rising costs for feed ingredients such as corn and soybeans. Last year, the U.S. experienced its worst drought since the 1930s, which pushed crop prices to a record.
The shares have declined about 18 percent in the past five years before Wednesday, while competing U.S. meat producers Hormel Food Corp. and Tyson Foods Inc. climbed 118 percent and and 37 percent respectively in the same period.
Smithfield’s hog farms have held back the company’s performance, shareholder Continental Grain Co. said in March. The meat company should consider splitting up its packaged meats, international operations and livestock businesses, Continental said in a March 7 letter. It also called for the company to start paying a dividend and to add several new directors to the board.
Smithfield has been talking to Shuanghui about a deal since late last year and Continental’s letter “probably accelerated” the discussions, Pope said.
Despite the call to split up Smithfield, the company had already successfully accessed the Chinese market, said Tim Ramey, a Lake Oswego, Ore.-based analyst for D.A. Davidson & Co. That’s because of the structure of its business, which spans raising pigs to packaging bacon, he said.
“This deal is a clear vindication of the Smithfield strategy of vertically integrated pork operations,” Ramey said.
China was the third-biggest buyer of U.S. pork in 2012, after Japan and Mexico, according to U.S. Department of Agriculture data.
Chinese annual per-capita meat consumption is about 88 pounds and will likely double in the next few years as the food supply catches up with more developed countries, Henan Shuanghui Investment President Zhang Taixi said in March.
The takeover will be financed through a combination of cash, the rollover of existing Smithfield debt, and additional debt that has been committed by Morgan Stanley and a group of banks, according to the statement.
The Shuanghui offer values Smithfield at about 7.4 times annual earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg.
“Any number of companies could buy Smithfield at a premium to the $34 bid,” Ramey said. “We would not be surprised to see a higher offer.”
Charoen Pokphand Foods PCL and JBS SA were preparing bids for Smithfield Foods Inc., said people familiar with the matter.
Under the terms of its agreement with Shuanghui, Smithfield has 30 days to continue talks with Charoen Pokphand Foods and JBS, said one of the people, who asked not to be named because the deliberations are private. While the meat producer can’t actively seek better offers, it can respond to unsolicited bids that are superior to Shuanghui’s, that person said.
It wasn’t immediately clear whether JBS or Charoen Pokphand Foods would consider counter bids for Smithfield. Shares of Smithfield rose $7.38, or 28.4 percent, to close Wednesday at $33.35.
Information for this article was contributed by Shruti Date Singh, Elizabeth Campbell, Joyce Koh, Jeffrey McCracken and David Welch of Bloomberg News and by Michael J. De La Merced and Mark Scott of The New York Times.
Business, Pages 25 on 05/30/2013