In what could be the largest takeover of a U.S. company by a Chinese company, Chinese meat processor Shuanghui International Holdings has agreed to acquire No. 1 pork producer Smithfield Foods for $4.7 billion.
Smithfield shareholders will receive $34 a share under the deal, a 31% premium over Smithfield's closing stock price of $25.97 on Tuesday. Smithfield shares closed up 28% Wednesday at $33.35.
The companies put the deal's total value at about $7.1 billion, including debt.
Smithfield is the world's largest pork processor and hog producer. It sells packaged products under popular brands such as Farmland, Armour, Cook's and Smithfield.
Shuanghui of Hong Kong owns businesses including food, logistics and flavoring products. It's the majority shareholder of China's leading meat processor, Henan Shuanghui Investment & Development.
The boards of both companies have approved the merger, which must still be cleared by Smithfield shareholders and U.S. regulators, including the U.S. Committee on Foreign Investment. The committee, which is made up of representatives from nine government agencies such as Treasury and the Justice Department, reviews foreign investments in U.S. companies for national security concerns.
For Shuanghui, the deal would provide a pipeline to a substantial pork supply. China accounts for half the world's pork supply and consumption, says analyst Tom Graves of S&P Capital IQ. In recent years, the country has been beset by food safety concerns.
"It could be the perception of the quality" of U.S. pork products played a role in the deal, Graves says.
Shuanghui Chairman Wan Long said the company "will gain access to high-quality, competitively priced and safe US products."
Smithfield, meanwhile, gets an opportunity to substantially increase its exports to China. The company gets 11% of annual sales from exports worldwide.
"The acquisition presents a material export opportunity for Smithfield and is beneficial for the U.S. hog farming industry in general," analyst Timothy Ramey of D.A. Davidson & Co. said in a research note.
A boost in exports by Smithfield could put upward pressure on U.S. pork prices, Graves said.
Some critics say the deal raises food safety concerns and should receive more scrutiny. In 2011, Shuanghui was found to have sold pork laced with clenbuterol, a banned veterinary drug that has been linked to human health risks.
With a handful of farms producing most food, "food safety problems on even a few factory farms can end up in kitchens across the globe," Wenonah Hauter, executive director of Food & Water Watch, said in a statement.
Richard Raymond, undersecretary of Agriculture for Food Safety from 2005 to 2009, doesn't think food safety is a concern.
"From a safety standpoint, they're still under USDA's food safety-inspection service, so I don't think that's an issue," he said.
Tom Sauermilch, an attorney and senior partner in the mergers practice at McDermott Will & Emery, says the deal should be easily approved by regulators "unless the process becomes politicized."
Food safety, he says, is not typically a national security concern, and existing U.S. agencies can police it. Approval of the merger could pave the way for other large takeovers of U.S. firms by the Chinese, Sauermilch says.
Still, Raymond said he's "surprised" and "disappointed" by the proposed merger. "I just hate to see a large American company like that going under foreign ownership," he said.
Shuanghui has 13 facilities that produce more than 2.7 million tons of meat per year. Under the agreement, there will be no closures at Smithfield's facilities and locations, including its Smithfield, Va., headquarters in the historic southeastern Virginia town of about 8,100 where it was founded in 1936, the companies said.
Smithfield's existing management team will remain in place, and Shuanghui also will honor the collective bargaining agreements with Smithfield workers. The company has about 46,000 employees.
"This transaction preserves the same old Smithfield, only with more opportunities and new markets and new frontiers," Smithfield CEO Larry Pope said in a conference call. "This is not a strategy to import Chinese pork into the United States ... this is exporting America to the world."
"People have this belief ... that everything in America is made in China. Open your refrigerator door, look inside. Nothing in there is made in China, because American agriculture is the most competitive and efficient in the world. This is the one place America can absolutely compete," he said.
With China and the U.S. being "the most important markets," Zhijun Yang, managing director of Shuanghui, said in a conference call with investors, "together we can be a global leader in animal protein. ... No other combination has such a great opportunity."
The Smithfield deal including assumed debt would eclipse a Chinese purchase of a stake in a big U.S. investment firm, as well. In December 2007, China Investment Corp. bought a 9.9% stake in Morgan Stanley valued at $5.6 billion, according to research firm Dealogic.