The $4.7bn offered by Chinese meat processor Shuanghui International for Smithfield Foods has been touted as the biggest-ever Chinese acquisition of a US company.
But what if the deal is something else entirely? To one observer, it looks like a leveraged buyout led by private equity groups and funnelled through a shell company with only tenuous connections to China. Is he right?
Peter Fuhrman, founder of investment firm China First Capital and commentator about the country’s private equity industry, looked under the hood of the Shuanghui-Smithfield deal and concluded that it was more LBO than acquisition – and more foreign than Chinese.
In his analysis, Fuhrman begins by highlighting the fact that the entity making the acquisition is Shuanghui International, a shell company based in the Cayman Islands, rather than the actual Chinese meat processor, Henan Shuangui Investment and Development.
Shuanghui International is the majority owner of Henan Shuanghui, but Fuhrman argues that it is more accurate to look at Shuanghui International as an investment holding company rather than the parent of a bigger Shuanghui group. If the deal is completed, Smithfield would be a separate legal entity under Shuanghui International, its accounts distinct from and not consolidated with those of Henan Shuanghui.
The next step is to argue that Shuanghui International is fundamentally a foreign entity, backed by foreign, not Chinese, money. Its ownership is led by CDH, a China-focused private equity group, but Fuhrman’s contention is that it is “definitively not Chinese” since it invests capital from around the world, from Abu Dhabi’s sovereign wealth fund to the Rockefeller Foundation.
Finally, it is clear that the deal has a large amount of leverage. In total, Shuanghui International will pay about $7bn for Smithfields, including its debt. Nearly all of that money is believed to be coming from bank loans. Bank of China will provide $4bn, while Morgan Stanley is lending the remaining $3bn, according to Reuters. That is about double Smithfield’s market capitalisation.
“Typical of such LBO deals, the equity holders … would stand to make a killing, if they can pay down the debt and then find a way to either sell or relist Smithfield at a mark-up,” Fuhrman writes.
In his view, the hype about ‘China’s biggest US acquisition’ is instead just a smokescreen for a potentially lucrative gambit by PE firms.
Fuhrman’s analysis is intriguing but not the whole truth. The use of a Cayman Islands shell company sounds inherently untransparent but it is a structure born of the regulatory restrictions in China, which make it hard for domestic firms to get money out of the country and to get approval for overseas deals.
Second, CDH is a Chinese private equity firm. It may have plenty of foreign investors but it also manages lots of Chinese cash. It is almost entirely focused on China in its investments and its partners and associates are also almost entirely Chinese.
Third, though Smithfield and Shuanghui China are likely to remain legally separate, the entire logic of the deal is predicated on them forming a closer alliance, with Smithfield catering to China’s growing appetite for high-quality meat with US-raised pork. If that does indeed come to pass, the Shuanghui-Smithfield partnership will be judged a China-US success story, regardless of the intricacies of the deal structure.
Smithfield offers $48m in retention bonuses for Chinese takeover FT
Chart of the week: Chinese M&A in the US – bringing home the bacon beyondbrics Smithfield bid tests US appetite for Chinese investment, FT
Chinese consumers pig out, FT Data Blog
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