June 3 (Bloomberg) -- Wan Long, who helped turn a single hog-processing plant into China’s largest producer, explains the reasons for his $4.7 billion swoop on Smithfield Food Inc. as he adjusts six miniature porcelain pigs on his desk.
The 72-year-old chairman of Shuanghui International Holdings Ltd., who last week won Smithfield’s acceptance for what would be the largest Chinese acquisition of a U.S. company, is not just reordering the pink and blue swines in front of him. He’s seeking to tap foreign expertise and technology to help reshape food safety and production in China’s pork industry.
“The question of food safety, whether it’s to American consumers or Chinese consumers, is a big deal,” Wan said in an interview at his office in Luohe city in Henan province, about 800 kilometers (500 miles) south of Beijing, sitting in front of a world map that hangs behind him. “Our nation has a tighter and tighter grip over food safety.”
Chinese consumers spend about $183 billion on pork a year, favoring pig head, feet and offal that aren’t popular on U.S. menus. The nation’s farms are mostly small, which combined produce about five times more pig meat than the U.S. China’s food industry had been wracked by scandals ranging from tainted milk to the illegal dumping of hogs in rivers.
Smithfield accepted Hong Kong-based Shuanghui’s offer of $34 a share on May 29, priced at a 31 percent premium to the close the day before, the companies said that day. The U.S. producer has 30 days to continue talks with possible buyers Charoen Pokphand Foods Pcl and JBS SA, according to a person familiar with the matter.
Prepared to Raise
Smithfield rose 0.1 percent to $32.98 at the close in New York.
Buying the Smithfield, Virginia-based hog producer would give Shuanghui access to more advanced production technology as well as 460 farms that raise about 15.8 million hogs a year. The bid by the owner of China’s top pork producer is valued at about $7.1 billion including debt. Shuanghui may raise its offer to meet other bids, Wan said during the May 31 interview.
Shuanghui International is a holding company that counts among its shareholders CDH Investments Fund Management Co., Goldman Sachs Group Inc., New Horizon Capital, Kerry Group and Temasek Holdings Pte., as well as Shuanghui employees and management, according to its website.
A vertical calligraphy paper scroll on the wall in the reception to Wan’s office, with black ink Chinese characters, may offer some insight into the deal. “Restructure and expand, good management and sound spending of money,” it reads.
Wan said the price they agreed to pay for Smithfield “isn’t cheap,” and that any possible increased bid would be made “while keeping in mind the costs.” Shuanghui said yesterday it had no confirmation of competing offers for Smithfield and that its bid was “fair.”
Shuanghui began operating a single processing plant in Luohe in 1969 and introduced its first branded sausage in 1992, according to its website. It produces more than 2.7 million metric tons of meat a year from plants in 13 provinces. Zhang Taixi, president of Henan Shuanghui Investment & Development Co., Shuanghui’s listed unit, said in a May 18 interview that the company makes more than 100 million sausages a day, or about one for every 13 of mainland China’s people. That production rate equates to about 36.5 billion sausages a year.
“Chinese traditionally like to eat pork,” said Chairman Wan. Secondly, “China doesn’t have the resources to raise cattle on a large scale. If there isn’t a lot of beef, you’ll have to eat pork if you like to eat meat,” he said.
Wholesale pork prices averaged 21.3 yuan a kilogram ($1.60 a pound) in China in 2012, according to the Ministry of Commerce. The nation consumed 52.7 million tons that year, according to the U.S. Department of Agriculture, at a value of 1.1 trillion yuan, according to Bloomberg calculations. The China cost compares with the most recent U.S. price of $95.03 a hundredweight for boxed pork carcasses.
The number of hogs available for slaughtering in China rose 5.2 percent to 696 million in 2012, while those remaining as livestock advanced 1.6 percent to 475 million, according to the National Bureau of Statistics.
“China spends tens of millions of dollars every year importing U.S. piglets or breeding swines because the U.S. has much better technology in that field,” said Li Qiang, chairman of Shanghai JC Intelligence Co., an agricultural research company. Increased pork imports would also cut pollution at home, Li said.
Farmers with annual production of less than 50 hogs available for slaughter contribute 35 percent of the nation’s output, while producers with less than 500 contribute 65 percent, according to James Feng, general manager of Soozhu.com, China’s biggest independent hog researcher. Pig farming consumes large amounts of crops and water, and produces pollution, while urbanization is reducing the supply of land in China, he said. In the U.S., 53 percent of farms produce 5,000 or more pigs a year, according to the National Pork Producers Council website.
The world’s farmers are estimated to produce 107.4 million tons of pig meat in the marketing year 2013, according to the USDA. China’s output, the largest, is predicted at 53.8 million tons, compared with U.S. production of 10.7 million tons. China imported more than 1.3 million tons of pork and its byproducts last year, including more than 500,000 tons from the U.S., Shuanghui said yesterday.
“The U.S. has sufficient farming land and water resources,” Feng said. “Buying Smithfield is to secure the supply of feed and water to pigs for Shuanghui.”
Shuanghui imports all its slaughtering and processing equipment from the U.S. and Europe, said Wan. He’s been to the U.S. many times and includes visits to supermarkets on his trips, especially those selling Chinese-style products such as steamed buns and pancakes, he said.
“Europe and America have excellent skills and equipment,” he said. “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.”
China has been seeking to reassure consumers about food, creating a new administration in March charged with overseeing food and drug safety in the country. Premier Li Keqiang told a government meeting in May a large amount of money should be spent for food safety to build up people’s confidence in what they eat, China National Radio reported May 13.
The efforts come after scandals including the deaths of at least six babies in 2008 because of melamine-tainted milk and the discovery of more than 9,000 dead pigs in Shanghai’s Huangpu river in March. Shanghai’s government said last month it was testing some mutton after police busted a ring selling rat, fox and mink as meat.
Shuanghui apologized in March 2011 over illegal additives found in its meat and halted output after China Central Television reported that farmers in central Henan province fed an additive to their pigs and then sold them to a slaughterhouse owned by the group. The company subsequently pledged to step up quality control.
Back in his ninth-floor office in Luohe, Wan says he never thought of buying an American company when he was a factory director at Shuanghui’s first plant about three decades ago. The porcelain pigs on his desk were a gift from a foreign meat industry guest, though he can’t recall who, he says.
The Smithfield deal will help accelerate Shuanghui’s global expansion plans, Wan says now, and he’s “fully confident” it will get shareholder and regulator approvals.
“China’s demand for meat products is getting bigger and bigger,” he says. “We very much need to bring in advanced production and technologies from overseas.”
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