The announcement that Smithfield Foods has entered into an agreement with Hong Kong-based Shuanghui International Holdings Ltd for a friendly sale of the company indicates a renewed commitment by Smithfield to pork export markets with China as the lead market. The sale price of $34 a share, ए 31 percent premium over the market, totals $4.7 billion in cash and values the company at $7.1 billion including assumption of existing debt. If finalized, it would the largest purchase of a U.S. company by a Chinese company.

Shuanghui International is a holding company that has international shareholders including Chinese private investment firm CDH Investments Fund Management Co., Goldman Sachs of the U.S., and Temasek Holdings, the Government of Singapore Investment Company. Shuanghui began operating a single processing plant in 1969 and introduced its first branded sausage in 1992. It produces more than 2.7 million metric tons of meat per year from plants in 13 provinces. Shuanghui, which also goes by the English name Shineway Group, was a government-run enterprise until a division ofGoldman Sachsand CDH Investments bought out the governments interest in 2006. It now has a publicly listed company, Henan Shuanghui which slaughters more than 15 million hogs per year and is Chinas largest meat processor.

Privately owned does not mean without political connections. Like many of China’s business leaders, श्री. Wan Long, Chairman of Shuanghui Holding, has political connections in Beijing. He has been a member for 15 years of China’s National People’s Congress, the national legislature that meets once a year to formalize measures proposed by leaders of the Chinese Communist Party.

Smithfield and Shuanghui have had shared commercial interests for years, and over the past four years have discussed ways to form a permanent relationship. Shuanghui has been especially interested in finding ways to increase pork imports from the U.S. Smithfield operations extend from raising pigs to processing them into ham and pork for customers throughout the world with $13 billion in revenue last year. It has a 26 percent share of U.S. pork processing and 15 percent share of U.S. hog production. While Smithfield looks to be a good fit with Shuanghui, it also has critics.

Continental Grain Company, a large Smithfield shareholder, recently proposed to maximize shareholder value by splitting the company into three businesses: hog production; fresh pork and packaged-meats production; and international pork operations. In the third quarter of its fiscal year 2013, Smithfield posted a 3.2 percent rise in profit as higher sales of packaged meat offset a decline in fresh pork earnings and losses in hog production of $64.5 दस लाख, compared with a loss of $6.6 million a year ago. Wall Street investors have made similar proposals for Tysons chicken production business because they dislike the uncertainties of commodity production.

The hog production by Smithfield that Wall Street views as a negative is one of the reasons that Shuanghui was willing to pay a 31 percent premium over market value. Chinese swine producers and the government are committed to improving production efficiencies and reducing food safety concerns, but still have need for further improvements. Smithfield will provide hands on experience in large scale hog production and access to genetics to improve efficiencies and quality.

Shuanghui officials have also stressed that this business arrangement is all about food safety. That is a well known problem in China, and importing Smithfields expertise in operating in the U.S. where food safety is an integral part of pork production and processing will give the company a competitive advantage.

Shuanghuis Chinese political connections will also be valuable in addressing market access problems for U.S. pork such as the prohibition on the feed additive ractopamine that promotes growth. Smithfield is eliminating use of the additive to gain access to the Chinese market, but many U.S. trade policy officials see the ban as a non-tariff trade barrier. Shuanghuis business leaders may better understand the economic benefits of the product and make the proper arguments to government regulators.

While Smithfield would be a valuable source of pork imports for Shuanghui, it is not a major answer to Chinas need for a stable supply of pork. Smithfield, with over 800,000 sows producing over 20 million market hogs annually, is the top American pork producer, but China has roughly 50 million sows and slaughters 700 million hogs per year. Smithfields U.S. operations would account for 1.7 percent of the Chinese sow herd and 3 percent of Chinas 2012 slaughter.

Smithfield will have access to Shuanghuis logistics system within China. The company owns 15 logistics centers across 12 Chinese provinces as well as seven private railways with cutting-edge temperature-control technology. It also operates a fleet of 1,500 refrigerated vehicles.

Smithfield will voluntarily seek government approval of the sale from the Committee on Foreign Investment in the U.S. The review will be unusual because the panel is typically associated with oversight involving sensitive technology. The Smithfield acquisition comes at a critical time in China-U.S. relations, but the U.S. food supply is considered less sensitive, and U.S. meat producers freely export around the world. President Obamais scheduled to meet Chinese President Xi Jinping in California June 7-8.

Smithfield and Shuanghui officials have stressed that Smithfield would be an independent subsidiary and continue to be a growth business in the U.S. Those are essential to the purchase. Smithfield only has economic value if it continues to be run as it has been run and can help improve Shuanghui operations in China by continuing to lead outside China.

Cross-border consolidation of meat providers has become the norm in recent years since Brazils JBS SA bought Swift &. Cos beef and pork businesses and Pittsburg, Texas-based chicken producer Pilgrims Pride Corp. As trade continues to expand, efficiencies will be found across borders as consumers demand quality products at affordable prices. Smithfield has stressed the deal is about exporting pork, but long term China will export selected products to the U.S. on a seasonal basis if it can solve its food safety issues.

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