Two major acquisitions of western food firms by Chinese buyers are in the news today, with more bad signs for Shuanghui’s pending purchase of pork maker Smithfield (NSYE: SFD), and word that Shanghai-based Bright Food is seeking a large deal in Israel. Perhaps I’m being a bit pessimistic, but I see both of these deals ultimately failing due to the increasingly sensitive nature of cross-border food acquisitions. Western governments seem prepared to let Chinese firms purchase locally-based makers of individual food products, such as wines or cookies. But those same governments will be far more wary about purchases lower down in their food chains, which have the potential to affect much larger segments of broader food supplies.
I’ll explain all of that in more detail shortly, but first let’s look at the latest headlines, starting with reports that a hedge fund is lining up alternate buyers for leading US pork producer Smithfield Foods (NYSE: SFD), which has already agreed to be bought by China’s Shuanghui. The reports follow a period of ominous silence surrounding the deal, which appeared to be raising concerns among US politicians during US Congressional hearings over the summer.
Shuanghui originally announced the landmark deal back in May, offering $4.7 billion for Smithfield in what would be the biggest-ever purchase of a US company by a Chinese firm. (previous post) The plan is still being reviewed for national security clearance by US regulators, who said in July they were extending the review period. The latest media reports say activist hedge fund Starboard LP is working with investors to try to line up a bid that would be substantially higher than Shuanghui’s. (English article) Obviously such a higher bid would be more attractive to owners of Smithfield shares; but equally important, such a bid would give Smithfield an excuse to drop Shuanghui without the embarrassment of facing a US government veto of the deal.
From Shuanghui let’s look at Bright Food, China’s second largest food group that has been rapidly devouring global assets over the past 2 years including major brands in Britain and Australia. The latest reports say Bright has entered preliminary talks to purchase leading Israeli food manufacturer and distributor Tnuva, in a deal that could ultimately be worth around $1.6 billion. (English article)
Unlike the Shuanghui-Smithfield deal, which has already been signed and is simply awaiting government approval, this Bright-Tnuva deal looks very preliminary and is probably in the news because a local media learned about the talks. Bright has actually entered into many similar talks that never produced a deal during its global M&A binge, and such talks are indeed common among major global acquirers and most often end in failure.
In this case I would say that these new talks are unlikely to produce a deal, partly for the usual reasons like failure to agree on price or other financing issues. But equally important, I think this deal could also be quite sensitive, since Tnuva is Israel’s largest food manufacturer and the Israeli government might be reluctant to see the company taken over by a Chinese firm.
As I’ve said above, I think western governments want to be reasonable in their approach to M&A of their food companies by Chinese firms. On the one hand, they probably do want to allow most such acquisitions to go forward to show their commitment to fair trade. But on the other hand, food security is also a major issue for any country and acquisition of a major player like Smithfield or Tnuva will always attract bigger scrutiny. For that reason, I would bet the Shuanghui-Smithfield deal will ultimately collapse, and the Bright-Tnuva talks also will end quietly without any deal.
Bottom line: Shuanghui’s bid for Smithfield and Bright’s for Tnuva are both likely to fail due to political concerns of food security.