Who Does the Success of Shuanghui’s Acquisition of Smithfield Depend On?

On May 29, 2013, Shuanghui International Holdings Limited and the US company Smithfield Foods (Smithfield Foods, NYSE: SFD) jointly announced that Shuanghui International will pay a total of $7.1 billion for Smithfield. (Screenshot from Shuanghui homepage)
On May 29, 2013, Shuanghui International Holdings Limited and the US company Smithfield Foods (Smithfield Foods, NYSE: SFD) jointly announced that Shuanghui International will pay a total of $7.1 billion for Smithfield. (Screenshot from Shuanghui homepage)

On May 29, 2013, Shuanghui International Holdings Limited and the US company Smithfield Foods (Smithfield Foods, NYSE: SFD) jointly announced that Shuanghui International will pay a total of $7.1 billion for Smithfield. Under the agreement, Smithfield will receive $4.7 billion in cash and Shuanghui will assume Smithfield’s debt of approximately $2.4 billion later.

The acquisition deal has not yet reached a substantial success, but both parties have gained a lot in stock prices. However, for this transaction to reach its final stage, it must pass two hurdles.

Two hurdles to pass

First, although the management of both parties have reached an agreement, the deal still needs to be supported by Smithfield’s shareholders. In addition, this transaction also needs to be reviewed by the Committee on Foreign Investment in the United States.

Second, the biggest blind spot in this transaction is that both parties have forgotten that they will need the approval of the majority of consumers. Will consumers purchase products from the new company? If they cannot pass this hurdle, it is like the reflection of the moon on water or the reflection of a flower in a mirror – it can only be seen, but cannot be obtained.

Shuanghui had a “Clenbuterol” incident in 2011and a “maggot gate” incident in 2012. Both incidents endangered consumers and involved food safety issues.

According to a China Business News report, after the “maggot gate” incident, a survey among 3554 netizens showed that about 50 per cent of participants said they would no longer purchase Shuanghui products after the Clenbuterol incident and 30 per cent more said they would not buy Shuanghui products after maggot gate incident.

Therefore, Shuanghui is unlikely to save itself through the purchase of a big US company.

An antagonistic effect

News of Shanghui’s acquisition of Smithfield appeared on People Daily’s front page on May 31. It was hailed as a great business deal that would have a positive impact etc. However, Chinese people do not trust official media and their reports normally bring negative reactions. The more that official media promote the company, the more consumers the company will lose.

The Washington Post reported this transaction, citing that some of the US food safety experts worry about food safety and that some readers of the newspaper even claimed they would never buy Smithfield Foods products.

The British Financial Times reported that China and Russia recently banned the import of feed containing the growth hormone ractopamine, while Smithfield Foods was one of the first companies to provide ractopamine to pork suppliers.

The Financial Times also pointed out that this transaction is not so much to export Chinese products to the US, but that Chinese companies want to have safe raw materials from the US.

Smithfield Shuanghui

In summary, whether Shuanghui’s acquisition of Smithfield Foods succeeds depends on consumers. Without their approval and recognition of the company’s products, Shuanghui’s dream cannot be fulfilled through this acquisition. (Screenshot from Smithfield homepage)

In summary, whether Shuanghui’s acquisition of Smithfield Foods succeeds depends on consumers. Without their approval and recognition of the company’s products, Shuanghui’s dream cannot be fulfilled through this acquisition.

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