Shuanghui’s US acquisition highlights pork war

Shuanghui International’s $7.1 billion deal to buy Smithfield Foods in the US has been widely billed as a response to China’s repeated food scares, but American companies actually have to follow higher standards to be able to export pork to the mainland.

The bone of contention is a controversial food additive called ractopamine. It is used to make pigs grow faster, leaner and cheaper, but the effect on humans is not well understood and is claimed by some to pose a risk. It is banned in China, Russia and the EU, but not in the US, where for the past decade it has been widely used in feed products such as Eli Lilly’s Paylean (it does what it says on the tin).

Regulators in China fear the drug may accumulate in organs such as the liver and kidney, which are common ingredients in Chinese cooking. In February, China said it planned to stop importing US pork unless it was verified by a third-party as being ractopamine-free.

The proposed ban alarmed US pig producers, as they have benefited handsomely from China’s food scandals, some of which have even involved ractopamine in pigs, including a scandal at Shuanghui in 2011 that helped US pork exports to China double to $900 million.

Like all major US pork producers, Smithfield uses the additive in its pigs, and the company stands by its safety, telling investors in February that it is “a safe and effective FDA-approved feed supplement used in the hog farming industry for many years to produce leaner pork”.

But in a concession to export customers, it also rears ractopamine-free pork in separate facilities. Indeed, it claims to be the biggest producer in the US, supplying more than 43,000 additive-free hogs a day.

However, US officials have so far refused to give in to China’s demands for a certification system and insist that assurances from producers are sufficient.

The prospect of a tie-up between Shuanghui and Smithfield could help the two countries bridge their differences, one way or the other.

“We are in close contact with the US government to address this situation, and our customers in China and Russia are also encouraging their respective governments to develop a protocol with the US government that is acceptable to all parties,” said Larry Pope, Smithfield’s president and chief executive officer, in the note to investors.

There is plenty at stake. Shuanghui has agreed to pay $4.7 billion for Smithfield shares and will also assume $2.4 billion of debt, paid for through cash and a syndicated debt financing led by Morgan Stanley.

Barclays is financial adviser to Smithfield and Simpson Thacher & Bartlett and McGuireWoods are legal counsel. Morgan Stanley is advising Shuanghui and Paul Hastings and Troutman Sanders are legal counsel.

Despite the tussle over certification, both companies stressed the food-safety aspect in a statement announcing the merger agreement. “Shuanghui will gain access to high-quality, competitively-priced and safe US products, as well as Smithfield's best practices and operational expertise,” said Wan Long, the Chinese company’s chairman.