Yesterday’s announcement that Smithfield Foods has been purchased by China’s largest publicly-traded meat processor was all the buzz in the livestock/meat sector – and rightfully so.This is a major purchase by a company from a country that some expect to eventually become the largest U.S. pork export customer. Remember the “China Principle” – 1.3 billion times any number is a very big number!
• First, the specifics of the deal. China’s Shuanghui Holdings, Ltd., parent company of Henan Shuanghui, the Chinese meat processing firm, is buying Smithfield for $34/share. That’ a premium of about 30% to the stock’s recent value and puts the transaction price at $4.7 billion in cash. According to a report from National Public Radio, it also values Smithfield at $7.1 billion. Several sources reported that that value makes this the largest Chinese purchase of a U.S. company to date.
• Second, it appears Shuanghui intends to leave Smithfield’s management in place and has no plans to make changes in Smithfield’s operations. Smithfield CEO Larry Pope says the company won’t close any facilities and will leave all employee agreements in place.
• Third, let’s keep this in perspective. While Smithfield is a behemoth both as a packer and hog producer, it is a drop in the bucket compared to hog numbers, pork production and pork consumption in China. The accompanying tables show Smithfield’s importance in the U.S. industry. It has roughly a 26% share of U.S. hog slaughter capacity and a 16% share of the U.S. sow herd. (Note that the Successful Farming numbers are sows only, so we assumed that 10% of the June 1 U.S. “kept for breeding” number was comprised of replacement gilts and boars in arriving at that 16% figure.) But where 862,000 sows will produce somewhere in the vicinity of 20-22 million market hogs/year, China in 2012 had 49.28 million sows and slaughtered 694 million hogs. Smithfield’s U.S. numbers would account for 1.7% of the Chinese sow herd and 3% of China’s 2012 slaughter.
So what are the implications of this purchase for the U.S. pork industry?
The purchase doesn’t change the structure of the U.S. industry at all and thus should have no impact on the competitive landscape. In spite of the predictable outcry by small farm advocates and even some U.S. lawmakers, the purchase doesn’t change concentration levels or remove any competitors from the U.S. marketplace.
There is no reason that U.S. antitrust laws should come into play in any review of the transaction. The sale is subject to review by the Committee on Foreign Investment in the United States, but we understand that that group’s major focus is on national security issues and we don’t see that this one poses any such threats.
Does this potentially transfer U.S. technology to China? Smithfield may have some unique systems or procedures but we doubt that there is much, if any, technology in Smithfield’s plants or hog farms that Chinese firms could not access already. U.S .firms have been actively working with Chinese companies for years and, again, raising and processing pigs probably doesn’t involve much spying or missile technology.
We suspect that the merger will enhance U.S. pork exports to China. It just makes sense that owning a U.S. company will make things smoother for shipments – at least from that company. If that occurs, other U.S. producers and packers will see higher prices and have an opportunity to increase output to backfill the domestic pork supply.
The merger may also push other U.S. firms to develop closer relationships in China, increasing U.S. exports even more. U.S. hog and pork prices may increase in the short run if exports in fact grow – but those price increases will be temporary as long as U.S. producers are not limited by policy decisions, regulations or higher costs in reacting to higher prices. Markets will work if allowed to do so!
The merger explains to some degree the fervor with which Smithfield has shifted to not feeding ractopamine for about 50% of its output. Smithfield’s sizable vertical integration back into production means the system can meet China’s ractopamine-free demands more easily than non-integrated systems can.
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