What’s more, the deal puts a major company from a Chinese industry with a history of food-safety problems in charge of a U.S. firm with past environmental problems of its own.
Separately, U.S. government and business officials often complain that China uses strict control of its market of 1.6 billion people to force American companies that want to do business there to surrender intellectual property.
The deal may become a test of U.S. attitudes toward China as it moves through likely reviews by the Justice Department and the Committee on Foreign Investment in the United States.
With no obvious national security concerns stemming from the production of ham, bacon and sausage, Smithfield chief executive C. Larry Pope said he expects approval. He emphasized that the deal wasn’t about bringing Chinese pork products or management standards to the United States but about sending U.S. products and expertise the other way. The deal will leave intact Smithfield’s management, workforce and 70-year presence in Virginia, he said.
“I know how people react — that we are selling out to the Chinese. This is not selling out to the Chinese. This is Smithfield being part of a global organization,” Pope said at a media briefing after the deal was announced. “There will be no impact on how we do business in America and around the world. . . . This is about America exporting.”
Concerns in Tidewater
The acquisition puts under Chinese ownership a prominent American brand and one of Virginia’s best-known companies. The tidewater town of Smithfield has been synonymous with ham production for decades. With roots in a local packing plant, the parent company grew into a conglomerate that includes popular brands such as Armour, sponsors the Richard Petty Motorsports NASCAR team, and has developed genetic strains that the company’s annual report promotes as “the leanest hogs commercially available.”
In the largest single Chinese purchase in the United States, that history and know-how will be absorbed into a firm that has its own global ambitions. Officials of Shuanghui, already the largest pork producer in a nation where pork consumption has exploded in tandem with national income, have said that they want to make their company one of the premier meat producers in the world.
The takeover comes as a surprise, said Ron Pack, president of Smithfield Station, a hotel on the town’s Pagan River waterfront that serves many Smithfield products, including sausages, bacon and pork chops. “I’m a little apprehensive, but I think everything will be fine,” Pack said.
Smithfield Mayor Carter Williams said people in town have expressed concerns about whether jobs might eventually disappear. “I don’t like to see it,” Williams said. “I don’t think a lot of people do. We’re a little hometown place here.”
A top Virginia official said the deal is expected to help the state’s economy.
“We’re looking at this as a really good thing,” said Todd Haymore, Virginia’s secretary of agriculture and forestry. “China represents the grand prize, as far as pork exports are concerned.” Smithfield’s access to that market could lead to significant economic opportunities for smaller growers who supply the company with hogs and for the Port of Virginia, if exports increase.
He said it was “premature” to speculate about issues such as whether the new owners might squeeze small farmers to lower their prices, or whether a substantial jump in exports might raise prices for U.S. consumers.
Debate over food safety
Food-safety advocates criticized the deal.
In China, food safety has become a major issue as the government battles a steady string of reports about tainted milk, rodent meat disguised as lamb, the overuse of pesticides and the dumping of thousands of rotting pigs by farmers into a Shanghai river. Shuanghui closed a plant two years ago after reports that it fed pigs an illegal chemical to make the meat more lean.
Smithfield has had its own environmental and financial troubles, including a $12 million fine levied in 1997 for several thousand clean-water law violations, a clash with North Carolina over manure-filled lagoons, and Humane Society complaints that led the company to agree to change some of its animal-handling practices.
“When you have a giant merger like this, the investors want profitability,” said Wenonah Hauter, executive director of the consumer advocacy group Food & Water Watch. “There will be more pressure to be profitable, and probably more shortcuts.”
The deal comes amid a record flow of investment by often cash-rich Chinese companies into the United States. While Chinese firms have taken over some well-known U.S. brands, including the AMC theater chain and IBM’s personal computer business, the Smithfield acquisition is the first major foray into the food industry and the most significant in terms of a daily consumer item.
Thilo Hanemann, a Rhodium Group analyst who tracks Chinese investment in the United States, said the deal represents an emerging strategy of Chinese companies to buy up market-leading expertise — whether the insight an AMC has into running a national theater chain or the skill Smithfield has in raising, slaughtering and processing pigs.
In many cases, he said, “Chinese companies are buying assets in the U.S. not to expand in the U.S., but to gain a competitive edge at home.”
The $34 per-share price that Shuanghi agreed to pay represents a roughly 30 percent premium over Smithfield’s stock value at the close of business on Tuesday.
With U.S. pork consumption largely stagnant, Smithfield posted record sales of $13 billion last year and a profit of $361 million — growth driven by overseas sales.
Like many American companies, pork producers have had some success exporting to China, but also faced setbacks — such as an unexpected prohibition on the common animal food additive ractopamine.
Pope said Smithfield is eliminating use of the additive. But the merger with Shuanghui is expected to help smooth other export barriers.
“No other combination [of companies] has such a great opportunity,” Zhijun Yang, managing director of Shuanghui, said during a conference call. “Chinese consumers like American pork. American farmers want access” to the Chinese market.
The anticipated review by the federal foreign investment panel will be unusual: the panel is typically associated with oversight of deals involving sensitive technology. Still, the Smithfield acquisition comes at a sensitive moment in China-U.S. relations, and given the size and prominence of the deal, Pope said the company was voluntarily submitting it for review. Allegations of cyberspying, among other issues, have raised tensions between the two countries, and the United States has been closely analyzing deals involving Chinese firms.
“No one can deny the unsafe tactics used by some Chinese food companies,” said Sen. Charles Grassley (R-Iowa), who urged a close review by the committee on foreign investment. “To have a Chinese food company control a major U.S. meat supplier without shareholder accountability is a bit concerning”
Jia Lynn Yang and Amrita Jayakumar contributed to this report.