Shuanghui IPO plan offers meat for Hong Kong
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.
As a former reporter, I know that western media love to focus on negative news and therefore coverage of these US hearings may not reflect the broader tone at the actual hearings. Furthermore, the hearings don't have any direct impact on the approval process, since the final decision lies with the Obama administration.
But all that said, I also realise that food security is a sensitive issue in most countries, which are always reluctant to rely too much on other countries for such an important product. Such concerns are one of the main factors behind the big government spending on agricultural subsidies in the US, Europe and Japan. That sensitivity is unlikely to change anytime soon. That leads to my conclusion that chances of approval for the Smithfield now stand at just 50-50, and the deal could ultimately get blocked due to national security concerns.
Bottom line: Shuanghui's plan for a Hong Kong IPO after buying Smithfield would attract strong investor interest, but the deal could be blocked over food security concerns.