March 20, 2023

DealBook: Shuanghui Agrees to Buy Smithfield for $4.7 Billion

8:49 p.m. | Updated

Demand for pork in China reflects its booming economy and rising middle class. But that rapidly growing appetite has strained its food production systems, leading to breakdowns and a number of food safety scandals.

Now China’s biggest pork producer, seeking plentiful supplies and technical expertise, has agreed to buy Smithfield Foods, the 87-year-old Virginia-based meat giant with brands like Armour and Farmland, for $4.7 billion in cash.

If completed, the deal that was announced on Wednesday would be the biggest takeover of an American company by a Chinese concern. But it must first overcome skepticism in Washington — and a potentially close examination process by United States regulators. Both Smithfield and its suitor, Shuanghui International, said that they will submit the deal for review by the Committee on Foreign Investment in the United States, or Cfius, a panel of government agencies tasked with clearing deals for national security.

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Typically, the committee is concerned with acquisitions that involve technology or vital natural resources. The nation’s food supply chain is not specifically mentioned in its mandate, but the panel’s jurisdiction is considered broad. Among the deals it has reviewed and approved in recent months are the proposed takeover of Nexen Energy by a Chinese oil company and the proposed sale of control of Sprint Nextel to a Japanese telecommunications firm.

The committee may consider whether Shuanghui has ties to organizations like the Chinese army, as well as whether Smithfield’s customer rolls include sensitive information like the locations of secure military installations.

“There’s a difference between a foreign company buying Boeing and one buying a hot dog stand,” said Jonathan Gafni, president of Compass Point Analytics, who was involved with the foreign investment committee when he was a deputy national intelligence officer. “But it depends on which corner the stand is on.”

Still, he expects the deal to pass muster.

Other hurdles lie in wait. A takeover by a Chinese company — because of well-publicized food safety scandals in that country — could prompt concerns among American consumers and consumer groups, who may worry that Shuanghui will ultimately export the pork it produces in China to the United States.

Smithfield and Shuanghui said that the deal was meant to do the opposite: increase exports of American products to China, already the nation’s third-largest export market for pork. Meat consumption in China has exploded over the past decade because of a growing middle class and a shift in diet from rice and vegetables to more protein.

The New York Times

“This transaction will allow us to access Asia in a big way,” C. Larry Pope, Smithfield’s chief executive, said in a telephone interview. “This is an export deal, and they are very interested in exporting products out of the U.S.”

Even so, many critics of Wednesday’s deal fear that the Chinese company may eventually seek to sell meat to the United States.

“They’re already trying to send their chicken products over here,” said Stanley Painter, chairman of the National Joint Council of Food Inspection Local Unions, which represents federal inspectors. “So I’m of the opinion this is going to get their foot in the door, letting them claim, We’re an American-based company now, and so why would you try to block us?”

China is no stranger to complaints about food quality. In recent years, the Chinese government has announced a crackdown on food makers while it also deals with an outbreak of bird flu and images of thousands of dead pigs floating in the Huangpu River in Shanghai.

The advantage of acquiring Smithfield is that it would give Chinese consumers greater access to imported meat that meets stricter food safety standards.

And China is struggling to produce its own supply. The nation’s production is considered inefficient and costly. Farms are smaller, and production and processing facilities are less sophisticated.

Although China, the world’s biggest market for pork, has begun introducing bigger farms and processing facilities, the country is still dominated by family-style farms and logistical bottlenecks that raise the cost of producing pork and other meat products.

“They’re not very efficient at producing it, which is why they’re importing it from us,” said David Warner, a spokesman for the National Pork Producers Council, a trade group based in Washington.

By comparison, the United States has ample grain and space for enormous hog farms. Last year, American producers exported about $866 million in pork products to China, 14 percent of all United States pork exports.

Some food experts said that Chinese ownership should not affect food safety at Smithfield. The company has had a good record on controlling pathogens, said Bill Marler, a Seattle-based lawyers who represents the victims of food-borne illnesses.

“They have had few recalls, and none that I know of that were ever linked to illnesses,” he said.

On the other hand, Shuanghai, which also goes by the English name Shineway Group, has struggled with food quality issues.

Two years ago, China’s biggest state-run television company, China Central Television, broadcast an investigation that found that Shuanghui was selling pork produced with clenbuterol, which is banned as a food additive in the United States, the European Union and China because of health risks.

That year, the country arrested scores of people for producing, selling and using clenbuterol, which is believed to produce leaner meat.

Shuanghui apologized and promised to improve its food safety program.

Founded nearly 20 years ago, the company was a state-run enterprise until a division of Goldman Sachs and CDH Investments, one of China’s leading private equity firms, paid more than $100 million several years ago to buy out the government’s interest.

Shuanghui now has a publicly listed company and other food divisions with assets of more than $5 billion.

Wednesday’s deal fulfills a major ambition of the Chinese government, to encourage companies to venture abroad by acquiring assets, resources and technical expertise. In North America, Africa and Australia, Chinese companies, flush with cash, are buying up land and resources to help a country that is plagued by water shortages and short of arable land, a situation exacerbated by a long running property and infrastructure boom.

In the meat industry, few companies loom larger than Smithfield, an empire whose operations extend from raising pigs to processing them into ham and pork for an array of customers. Founded as a packing plant in the Virginia town that shares the company’s name, it has since grown into a behemoth that reaped $13 billion in revenue last year.

Under the terms of the deal, Shuanghui will pay $34 a share for Smithfield, which is 31 percent above the company’s closing share price on Tuesday.

Smithfield and Shuanghui have long had ties, and over the past four years the companies discussed ways to cement an alliance. Shuanghui has been especially keen to find ways to increase the amount of pork it could import from the United States.

Late last year, Mr. Pope, Smithfield’s chief executive, said the two discussed buying stakes in each other. Around March, an adviser to Shuanghui called Smithfield and offered a different approach: an outright takeover of the American company.

“They said, ‘Larry, let’s make this thing happen. We think you’re going to like it,’ ” Mr. Pope said.

But Smithfield had received takeover proposals from two other foreign suitors before signing its deal with Shuanghui, according to people briefed on the matter.

Smithfield was advised by Barclays and the law firms Simpson Thacher Bartlett and McGuireWoods. Shuanghui was advised by Morgan Stanley and the law firms Paul Hastings and Troutman Sanders.

Michael Moss and Mark Scott contributed reporting.

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DealBook: Chinese Make $15 Billion Move Into Canada

12:37 p.m. | Updated

The great energy rush continues.

On Monday, Cnooc, the Chinese state-run oil giant, agreed to buy Nexen of Canada for $15 billion, as global players look to beef up their access to natural resources.

Under the terms of the deal, Cnooc will pay $27.50 a share for the Canadian oil and natural gas company. The price is 61 percent above Nexen’s closing price on Friday.

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Cnooc has also offered to buy Nexen’s preferred shares for about $25.58 each, as well as accrued dividends, pending approval by that class of investors.

Companies around the world have been scrambling to build up their holdings in so-called unconventional resources, which include the gas-rich hard rock formations that underpin today’s drilling boom. (Separately, Sinopec, another Chinese oil company, announced on Monday that it has purchased a 49 percent stake in Talisman Energy‘s holdings in the North Sea for $1.5 billion.)

Among Nexen’s properties are parts of the oil sands in Canada’s Alberta province.

Through the acquisition, Cnooc will also gain valuable footholds in oil- and gas-producing areas around the world, including western Canada, the North Sea, the Gulf of Mexico and the waters off Nigeria.

“This is an exciting opportunity for us to build on our existing joint venture relationship with Nexen in Canada, and to acquire a leading international platform in the process,” Wang Yilin, the chairman of Cnooc, said in a statement.

The Canadian industry minister and the country’s competition watchdog said on Monday that they will review the deal.

The deal is one of the biggest overseas expansion efforts by a Chinese company to date. Cnooc was behind one of the biggest efforts when it sought to buy Unocal, an American oil company, only to be blocked by national security concerns.

The unease over major Chinese companies buying up valuable assets like natural resources has since lingered, helping to dissuade many of these entities from making bids for assets. Nearly two years ago, Sinochem, a Chinese chemicals maker, considered but decided against a bid for the Potash Corporation of Saskatchewan, deciding that it could not ease nationalist concerns in Canada.

This time around, Cnooc appears to be aiming to defuse protectionist sentiment. Much of its statement describes the deal’s benefits for Canada, noting that Cnooc has already invested 2.8 billion Canadian dollars in the country.

Cnooc said it would establish Calgary as the head of its North American and Central American operations, and would retain Nexen’s existing management team. The Chinese company also said it would list its shares on the Toronto Stock Exchange and promised to support research in Alberta.

It has also sought to allay concerns in other countries, including the United States and Britain.

Under provisions of Monday’s deal, while Nexen cannot actively look for higher bids, it can consider any that other companies make on their own. Cnooc has the right to match any such proposal.

If directors of Nexen withdraw their recommendation, the company must pay Cnooc a $425 million breakup fee. But if the deal falls apart because of Chinese regulatory reasons, Cnooc must pay $425 million.

Cnooc was advised by BMO Capital Markets, Citigroup and the law firms Stikeman Elliott and Davis Polk Wardwell.

Nexen was advised by Goldman Sachs, RBC Capital Markets and the law firms Blake, Cassels Graydon and Paul, Weiss, Rifkind, Wharton Garrison. Its board was counseled by the Richard A. Shaw Professional Corporation and Burnet, Duckworth Palmer.

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Argentina Hopes for a Big Payoff in Its Shale Oil Field Discovery

In May, the Argentine oil company YPF announced that it had found 150 million barrels of oil in the Patagonian field, and President Cristina Fernández de Kirchner rushed onto national television to praise the discovery as something that could give new impetus to the country’s long-stagnant economy.

“The importance of this discovery goes well beyond the volume,” said Sebastián Eskenazi, YPF’s chief executive, as he announced the find. “The important thing is it is something new: new energy, a new future, new expectations.”

Although there are significant hurdles, geologists say that the Vaca Muerta is a harbinger of a possible major expansion of global petroleum supplies over the next two decades as the industry uses advanced techniques to extract oil from shale and other tightly packed rocks.

Exploration of similar shale fields has already begun in Australia, Canada, Poland and France. Indian and Chinese oil companies are investing in pilot projects that, if successful, could make their countries significant oil producers, possibly reshaping energy geopolitics and stemming future price rises. Ukraine and Russia are also thought to have sizable shale fields of oil and gas, as do many North African and Middle Eastern countries.

“The potential is huge, on the order of hundreds of billions of barrels of recoverable reserves,” said Michael C. Lynch, president of Strategic Energy and Economic Research, a consulting firm, who is preparing a report on global shale oil.

Similar fields in North Dakota and Texas are already beginning to gush oil. The techniques used to extract it include hydraulic fracturing, in which high-pressure fluids are used to break up shale rock to release the oil, and horizontal drilling, which allows drillers to tap thin layers of oil-filled shale that are sandwiched between layers of other rock.

Oil experts caution that geologists have only just begun to study shale fields in much of the world, and thus can only guess at their potential. Little seismic work has been completed, and core samples need to be retrieved from thousands of feet below the surface to judge how much oil or gas can be retrieved.

Skeptics also say that even if oil is found in many of these fields, some may not be recoverable using current technology.

Hydraulic fracturing, known as fracking, has drawn significant opposition in the United States and France because of concerns that the fluids used can pollute groundwater. Also, the process requires vast amounts of water, a problem since many of the fields are in dry regions.

Another barrier to widespread exploitation of oil shale is that few companies have the expertise and experience to do the work. Chinese and Indian oil companies are investing in joint shale ventures in the United States and other countries in part so they can learn the new exploration and drilling techniques.

The search for oil in tight rocks began in the United States about three years ago, and the potential for oil has been found from Texas to Michigan, California to Ohio. Domestic oil production from shale has grown to more than half a million barrels a day since 2009 and could reach three million barrels a day by 2020.

Oil companies are speculating that the early successes in the United States can be duplicated around the world. Exploration for gas from shale began a couple of years ago in China and around Europe, particularly Poland, and experts say some of those fields have oil potential as well.

“It could potentially be a game changer,” said Fadel Gheit, a managing director and senior oil analyst at Oppenheimer Company. “We are going to see much wider distribution of oil reserves, to the benefit of the whole world. It could rerank countries, in which the very needy might become self-sufficient. Countries like Canada and Australia could potentially become the new Saudi Arabia for energy.”

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