OpinionShuanghui IPO plan offers meat for Hong Kong

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Employees work inside a Shuanghui factory in Zhengzhou, Henan province. Photo: Reuters

Published: 10:42am, 17 Jul 2013

The controversial deal by China's Shuanghui to purchase leading US pork products maker Smithfield (NYSE: SFD) is taking a new twist, with words that the former may attempt a Hong Kong IPO if and when it completes the purchase. Such a share offering looks quite smart, as it would allow investors to tap China's huge appetite for pork. It would also allow them to buy into a major company whose size and foreign connections could reassure skeptical Chinese consumers jaded by a never-ending series of food scandals. But all that said, I have serious doubts about whether the deal will close due to building resistance in the US.

Let's start with a closer look at the IPO story, which has foreign media reporting that Shuanghui would attempt to raise up to $4 billion (HK$31 billion) through a Hong Kong listing following completion of the Smithfield purchase. Such a listing certainly looks logical, since Shuanghui already counts US investment banking giant Goldman Sachs (NYSE: GS) as one of its investors. Rival investment banking giant Morgan Stanley (NYSE: MS) is also helping Shuanghui to finance the purchase. Thus both of these foreign giants could help to organise a Shuanghui IPO in Hong Kong.

Shuanghui's previously announced deal is worth about $7 billion (HK$54.3 billion), including $4.7 billion in cash and assumption of Smithfield debt. Sources close to the IPO plan say that Hong Kong is the ideal place for such a listing, as it would allow both foreign and Chinese investors to buy into the deal. By comparison, China's two major stock markets in Shanghai and Shenzhen are largely closed to foreign investors, and are also much more volatile due to their strong presence of retail investors.

I do think this Hong Kong IPO plan looks like a smart move, as China currently lacks major investment choices in this particular food area. Pork is already the preferred meat of many Chinese consumers, even though the industry is highly fragmented and dominated by smaller pig farmers. That fragmentation has resulted in numerous quality issues, as spotlighted by a major scandal earlier this year that saw farmers discard tens of thousands of diseased pigs into the Huangpu River that flows past Shanghai.

If it succeeds in purchasing Smithfield, Shuanghui would acquire important foreign technology that could help it improve its pork production. Equally important, it would obtain access to foreign management techniques that could help it improve its quality control, helping to reassure wary Chinese consumers and thus giving it a competitive advantage over rival pork sellers.

Of course all of this is contingent on the deal getting approval from US regulators, which looks increasingly difficult amid ongoing hearings in the US congress that look increasingly negative. Those hearings have been getting regular coverage in the media, and look quite xenophobic to me, including talk of threats to US food security and harm to the domestic park industry.