A U.S. national security panel will vet Smithfield Foods Inc.’s purchase by a Chinese buyer for its effects on the food supply and proximity to military bases, though the review is unlikely to derail the deal, lawyers familiar with the process said.
“I don’t see deal-killer objections to this transaction,” said Stewart Baker, an attorney at Steptoe & Johnson LLP in Washington and a former Department of Homeland Security official. “The Obama administration doesn’t want to say ‘no’ to every Chinese deal.”
The review by the inter-agency Committee on Foreign Investment in the U.S., or CFIUS, will include scrutiny of Smithfield Foods facilities near military bases and other sensitive locations, said Stephen Mahinka, an attorney with Morgan Lewis & Bockius LLP, who according to his firm profile has won clearance from CFIUS for almost 40 deals.
In probing the acquisition by Shuanghui International Holdings Ltd., the panel will also look at the importance to the U.S. food supply of the Smithfield, Virginia-based company, the world’s biggest hog and pork producer, said Farhad Jalinous, a lawyer at Kaye Scholer LLP in Washington who represents companies in CFIUS cases.
“The integrity of the food-supply chain gives rise to national security considerations,” Jalinous said. “Is this likely to be blocked? Not likely, but based on the conclusions the government makes about the risk profile, CFIUS could require a mitigation agreement to resolve perceived risks.”
Republican Senator Charles Grassley of Iowa, saying a sustainable food supply is critical to national security, urged CFIUS to consider issues such as the role the Chinese government plays in the Hong Kong-based acquirer.
“To have a Chinese food company controlling a major U.S. meat supplier is a bit concerning,” he said in a statement.
Grassley’s home state produces $4.1 billion of pork annually.
Closely held Shuanghui said in a statement yesterday it would seek the non-mandatory CFIUS review for the acquisition. Valued at $7.1 billion including debt, the deal would be the largest Chinese takeover of a U.S. company, according to data compiled by Bloomberg.
The move follows CFIUS blocking at least three transactions in the past four years that would have resulted in Chinese companies gaining control of assets near military facilities. Huawei Technologies Co. and Bain Capital Partners LLC also dropped a bid to buy computer-equipment maker 3Com Corp. in 2008 in the face of CFIUS opposition. An attempt by Huawei to buy patents from 3Leaf Systems Inc., a computer services company, the year before met the same fate.
Other deals have required modifications. In February, CFIUS approved the acquisition of U.S. assets of Canadian energy company Nexen Inc. by Cnooc Ltd., China’s biggest offshore oil and natural gas producer. Although the companies never announced terms of the agreement with CFIUS, Cnooc was barred from operating oilfields in the Gulf of Mexico under the accord, people familiar with the matter told Bloomberg in March.
Those deals involved companies whose businesses are at the heart of CFIUS’s concerns, including computer networking, telecommunications, critical infrastructure and energy.
Chinese acquisitions that CFIUS has allowed to go through recently include Dalian Wanda Group’s $2.6 billion purchase of AMC Entertainment Holdings Inc. to create the world’s biggest cinema owner in May 2012. In August, Wanxiang Group Corp., China’s largest auto-parts maker, was given approval to buy A123 Systems Inc., a maker of lithium-ion batteries for electric cars, a deal opposed by some Republicans in Congress.
BGI-Shenzhen, a Chinese operator of genome-sequencing centers, won CFIUS approval in December to buy Mountain View, California-based Complete Genomics Inc., for about $117.6 million.
Submitting the deal for review by CFIUS is prudent given increased U.S. concern over technology transfers and cyber security, Mahinka said.
“Foreign companies today are erring on the side of filing,” he said.
If an acquirer doesn’t file when a deal is announced, CFIUS can still impose a review at any point in the acquisition process. That’s what happened last year to Ralls Corp., a Chinese-owned wind energy company that had to sell assets near a Navy airbase in Oregon, a government demand Mahinka said reflects heightened sensitivity regarding Chinese investors.
Smithfield owns 460 farms and has contracts with 2,100 others across 12 U.S. states, according to the company’s website. Its direct dealings with the military are limited to $12.5 million in contracts, according to procurement data compiled by Bloomberg.
CIFIUS, led by the Treasury Department, is also made up of representatives from the Justice, Homeland Security and Defense departments and five other agencies, any of which might have particular concerns about a takeover by a given foreign buyer.
Chinese companies, especially those that plan repeat investments in the U.S., would be well-advised to submit deals for review because “you start to become a known quantity,” Mahinka said.