Smithfield CEO Faces Lawmakers as Deal Raises Concerns

Smithfield Foods Inc. Chief Executive Officer C. Larry Pope will face lawmakers as the proposed $4.7 billion acquisition of the hog processor by a Chinese company sparks concerns over U.S. national security.

Pope is slated to testify today before the Senate Agriculture Committee in Washington and answer questions about intellectual property, product safety and the broader effects of greater foreign ownership of U.S. agribusiness.

Shuanghui International Ltd.’s friendly deal, the largest Chinese takeover of a U.S. company, would give it control of the world’s largest pork supplier, with 460 U.S. farms and contracts with 2,100 others. Shuanghui and Smithfield voluntarily submitted the transaction, which was announced in May, for approval by the Committee on Foreign Investment in the United States, a government body that reviews the national security implications of foreign investment.

“Given the size of the target, broad tensions with China and food safety scares there, this is an unprecedented deal that could lead to increasing political storms,” said Nova Daly, a consultant at Washington law firm Wiley Rein LLP who advises clients on CFIUS reviews. “It’s extremely rare for CFIUS to review a transaction involving a food-product company.”

A bipartisan group of senators is urging CFIUS to include both the U.S. Department of Agriculture and the Food and Drug Administration in its review to ensure experts on food supply and food safety are part of the process.

‘Critical Infrastructure’

“We believe that our food supply is critical infrastructure that should be included in any reasonable person’s definition of national security,” according to a June 20 letter to Treasury Secretary Jacob Lew signed by 15 members of the Senate Agriculture Committee, including Chairwoman Debbie Stabenow, a Michigan Democrat.

Shuanghui declined to comment on security issues before today’s hearing.

“As we said previously, we welcome a full review and fair consideration of the Shuanghui-Smithfield combination from the U.S. Government,” Smithfield said in an e-mailed statement. “We believe the proposed combination does not present any national security concerns, is good for U.S. farmers and agriculture and will advance U.S.-China relations.”

Blocked Transactions

CFIUS has blocked at least three transactions in the past four years that would have resulted in Chinese companies gaining control of U.S. assets near military facilities. Several of Smithfield’s farms and contractors are near military operations, according to Patrick Woodall, research director and advocate with Food & Water Watch, a Washington-based group pushing for cleaner resources.

The deal also has raised concerns that less-stringent attitudes toward food safety in China might taint U.S. practices, Woodall said. Smithfield’s technology would be used to improve Chinese pork production, increasing competition with Japan and South Korea, and the takeover would allow more Smithfield exports to China, raising U.S. pork prices and creating more domestic hog feedlots, he said.

“We get the manure, they get the meat,” he said.

Improved safety is a major motivation for Shuanghui’s bid, Chairman Wan Long said in June.

“If we go and purchase businesses from America and Europe, develop China’s meat industry, we will raise the level and standard of our food safety,” he said at the time.

Chinese Investment

Chinese investment in the U.S. this year may surpass the record set in 2012, according to the Rhodium Group LLC. Buyers from other foreign nations also are targeting U.S. companies: There were $13.1 billion of foreign takeovers of American food and agricultural companies announced in the first half of this year, according to data compiled by Bloomberg.

In 2012, companies announced deals valued at $23.6 billion, the most in at least 11 years, the figures showed. The 2012 total included the $4.6 billion takeover of Nebraska-based grain trader Gavilon Holdings LLC by Japan’s Marubeni Corp. (8002)

Food represents a new frontier in the complex relationship between the world’s two largest economies, said Mark McMinimy, an analyst at Guggenheim Washington Research Group in Washington. China is projected to pass Canada this year to become the biggest buyer of U.S. agricultural goods at $22 billion, according to the USDA. Lawmakers may be less concerned with the Smithfield deal itself than in exploring how to handle future foreign purchases of U.S. agricultural assets.

“Apart from air, which no one owns, food is about the most basic requirement we have,” McMinimy said in an interview. “China is going to go out and make purchases to fill weaknesses and holes in its food supply chain, and this may not be the last one. We may need to think about this more holistically.”

To contact the reporters on this story: Alan Bjerga in Washington at abjerga@bloomberg.net; Sara Forden in Washington at sforden@bloomberg.net; Shruti Date Singh in Chicago at ssingh28@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net; Jon Morgan at jmorgan97@bloomberg.net

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