Behind the Chinese Bid for Smithfield Foods

But behind the bid was a group of savvy investors and global deal makers who hold a substantial stake in the Chinese company: Goldman Sachs, CDH Investments, Singapore’s sovereign wealth fund and New Horizon Capital, a private equity firm co-founded by the son of the former Chinese prime minister Wen Jiabao.

The group controls nearly half the shares of Shuanghui International, much of which was acquired about seven years ago by helping privatize a company that had been run as a state-owned meat processor.

Today, Shuanghui is a $7 billion behemoth that is the dominant sausage maker and pork processor in China. The company is now seeking to complete the biggest Chinese acquisition ever of an American company.

The bid is subject to a national security review by the Committee on Foreign Investment in the United States, and that scrutiny will include a review of shareholder records.

Analysts say the Chinese company’s ownership structure is unlikely to complicate the review, since Shuanghui is not state-owned.

But the presence of so many of Asia’s power brokers in the bid illustrates not just how deals get done in China these days but also how Wall Street and Asia’s elites are likely to collaborate on future cross-border mergers and acquisitions.

America’s biggest private equity firms already have a major presence in China, with TPG, the Carlyle Group and Blackstone seeking deals. Often they co-invest alongside Asia’s biggest investment firms. One of the best-known is CDH Investments, a private equity and venture capital firm that manages more than $7 billion in assets with operations in Beijing. Founded in 2002, the company has invested in big food makers, like Mengniu Dairy, the Yurun Food Group and Shuanghui.

In 2006, CDH and Goldman Sachs led a consortium of investors who paid about $250 million to buy out the Chinese government’s stake in Shuanghui in the hopes of transforming the company into one of China’s biggest food companies.

Before the deal, Shuanghui’s ambitious chairman, Wan Long, was pressing to privatize a company under state control and saddled with operating its own school, hospital and employee housing. Mr. Wan said he wanted to focus on the core business.

“We should talk about pigs because all I know is pigs,” he joked during an interview at the company’s headquarters in Henan, several years ago. “We call the slaughter industry the sunshine business. Although it’s a traditional business, if you do it well, it is a sunshine and profitable business.”

But he made his ambitions clear: “Our goal is to be the biggest in China, and the leading meat supplier in the world.”

To revamp Shuanghui, Mr. Wan, who is 72 and still chairman, turned to CDH and Goldman Sachs. The move brought in foreign capital and other big investors, including Temasek, Singapore’s sovereign wealth fund, and New Horizon Capital.

An investment fund controlled by the Kwoks, one of Hong Kong’s richest families, also got a stake in the meat processor.

Soon after, Shuanghui set up an offshore entity, based in the Cayman Islands, which one of the company’s advisers said would be used to acquire Smithfield Foods, with financing help from Morgan Stanley, the company’s banker in the deal.

People involved in the deal say Goldman and CDH were the lead investors and that other investors played more passive roles.

Shuanghui’s management retains the majority stake in the company at around 36 percent of shares, but has more voting rights than other shareholders. The next biggest stake is CDH, at about 34 percent. Goldman and New Horizon each have about 5 percent and Temasek holds around 3 percent.

When the Beijing-based New Horizon was run by Winston Wen, also known as Wen Yunsong, the firm put about $20 million into Shuanghui in 2006.

Mr. Wen left New Horizon in 2010 after some in the industry criticized his company’s aggressive deal-making. He was later named chairman of the China Satellite Communications Corporation, a state-owned entity. It is unclear whether he or his relatives still have a stake in New Horizon, which is run by some of his former college classmates.

But in 2012, about a year after Shuanghui was hit by a food safety scandal involving the illegal additive clenbuterol, Mr. Wen’s father, who was then China’s prime minister, visited the company’s factories and headquarters. He encouraged its workers to put food safety first, saying that if the company made “unremitting efforts” it would shine brightly.

Article source: http://www.nytimes.com/2013/06/03/business/global/behind-the-chinese-bid-for-smithfield-foods.html?partner=rss&emc=rss