Smithfield and Shuanghui: Two Pigs in a Blanket?

Two Small Black pigs, champions at Smithfield Show

Two Small Black pigs, champions at Smithfield Show (Photo credit: Wikipedia)

It may not be the oldest profession in the world, but pig production has to be up there in terms of history. China has been producing pigs for more than 2,000 years, well before the United States was even a gleam in the eyes of the Founding Fathers. So, how can the largest pork producer in the U.S. offer credibility and technology to China’s largest meat processor? Even in this most basic of industries, the $4.7 billion ($7.1 billion including debt) offer for Smithfield Foods, Inc. (NYSE: SFD) announced on May 29 by Shuanghui International, illustrates how this U.S. acquisition will not only enhance Shuanghui’s image in China, but will also bring valuable know-how and technology to the company.

In our recent post, “Feeding China’s Population,” we noted that China is facing major challenges producing a sufficient supply of safe food for its 1.3 billion people. Moreover, recent food scares have made Chinese consumers extremely wary of anything that is produced in China and ingested into the human body. As a result, we predicted that Western companies and economies will be major beneficiaries of these challenges as Chinese consumers search for safer products. International Vitamin Corporation (“IVC”), a privately-owned, New Jersey-based vitamin company, and the deal for Smithfield are two examples of how this is already playing out.

IVC was founded in 2010 when a group of Chinese investors bought the vitamin and nutritional supplement business from Alere Inc. (NYSE: ALR) for $63.4 million. Although all of the production at IVC’s New Jersey facilities New Jersey currently go to Walmart, Walgreens, Wegmans, ShopRite, and Rite Aid in the U.S., the long-term plan is to export these vitamins to China. “They (Chinese consumers) have the perception that ‘U.S.-made’ is a premium product, has high quality and high efficacy, is more trusted,” according to IVC’s CEO Steven Dai.

In the case of IVC, Alere stockholders benefitted because Alere received cash for a business that presumably no longer fit into the company’s long-term strategy. In Smithfield, stockholders are benefitting directly by receiving a 31 percent premium on their shares. All of this for the stock of a company whose customers are in a mature American meat market where consumption has been shrinking for four consecutive years, according to the Department of Agriculture.

Like IVC, Shuanghui will benefit from Chinese consumers’ positive image of American-made products. Not only will its Smithfield subsidiary find a ready market in China for those products, but Shuanghui’s China-produced products are also likely to benefit from the company’s ownership of Smithfield. Chinese consumers would be right to assume that at least some of Smithfield’s safety and food production practices will ultimately also be transferred to Shuanghui’s Chinese facilities.

In addition to having access to Smithfield’s quality systems, though, Shuanghui will also benefit from Smithfield’s know-how in pig production. Although China has a domestic herd of 476 million pigs, approximately one-half of the global pig population, China has been a net importer of pork since 2008. A big part of the problem is in the productivity of China’s pig farming industry.

For example, one of the critical stages of pig production is producing weaned pigs from a sow, and this process has been perfected in the U.S., which had to improve the productivity of its agricultural sector long ago in order to remain globally competitive. The objective of a sow farm is to produce a steady supply of weaned pigs that weigh approximately six kilograms, a process that takes 21 days to complete. In the next stage of production, the farmer feeds the pig to increase its weight to 125 kilograms, at which point it is ready for market.

In the U. S., sow farms are managed in such a way that each sow can produce 22 or more pigs per year. In China, sows produce only 14 on average, nearly 40 percent less. Adopting the management practices that Smithfield uses in producing 15 million pigs per year is only one example of how Shuanghui will have access to advanced technology from Smithfield. There will be many other similar instances where Smithfield’s know-how will benefit the company.

Taking the IVC and Smithfield deals together, investors, farmers and the local governments in the U.S. will be prime beneficiaries of the negative image that “Made In China” has in food and other products taken by mouth. Apart from the acquisition prices paid by Chinese companies, American farmers will benefit from increased demands for their production, and local governments will benefit from the new jobs that are created as a result of increased export sales realized by factories in their cities and states.

This is the beginning of an important new trend–look for more transactions like IVC and Smithfield in the future.

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