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Smithfield Foods Takeover: China's Trojan Horse

08/13/2013 11:53 EDT | Updated 10/13/2013 05:12 EDT

The United States must reject China's $7-billion bid to buy the world's biggest pork producer, Smithfield Foods of Virginia.

The transaction was announced in May but is currently under review in Washington by authorities. Delays are due to concerns.

And there are many.

Most significantly, the transaction is another "Trojan Horse", a takeover template that is being used by China and its hundreds of sovereign-owned or controlled enterprises around the world with varying success. China buys an iconic company that gives it access to the internal market, technology and resources. This buys them political influence too.

The entity making the takeover is a holding company -- called Shuanghai International Holdings Limited -- that has subsidiaries and is the biggest meat processor in China. But the ultimate beneficial owner is a local Chinese government that adheres to the politics, policies and edicts of Beijing. This is true of virtually every Chinese corporation and is the nature of "China Inc.", the world's biggest state capitalist holding company with massive marketplace tools and capital.

A rejection by Washington of the Smithfield Foods buyout is necessary but has been labeled protectionist. It is not.

This transaction -- and thousands more worldwide -- represents a form of neo-colonialism by China Inc. because China would never allow Smithfield Foods to take over Shuanghai even if it could afford to. This is one-way acquisition in the global economy where reciprocity should be the rule. If China prohibits buyouts of its state enterprises then the developed world must prohibit buyouts of their free enterprises.

Reciprocity should be the requirement and that is something China Inc. has been offering -- a new trade deal with the Americans. But this has been offered in Canada and elsewhere but the fact is these trade deals offer limited access and no reciprocal rights to buy assets in China.

Fortunately, the U.S. Senate Committee on Agriculture has waded in with concerns and held public hearings to delve more deeply into the deal as well as its ramifications. This has also caused the agency that must approve foreign takeovers, the Committee on Foreign Investment in the U.S. or CFIUS, to delay its approval beyond the 30-day process for another 45 days until early September.

Smithfield is a $13-billion global food company and the leader in numerous packaged meat categories with popular brands including Smithfield, Farmland and Armour.

The buyer, Shuanghui International, started in 1958 by the local Luohe City Government as a single processing plant. Many acquisitions later, with Beijing subsidies and favors, the holding company now controls a subsidiary called Henan Shuanghui Investment & Development Co. Its meat subsidiary, Henan Shuanghui, is partially owned by Goldman Sachs and Singapore's sovereign fund.

And that's significant.

Goldman Sachs is a driving force behind this deal and I'm sure are lobbying vigorously, as is China.

This is why.

Plans would be to acquire Smithfield's stock, delist it from the U.S. markets and eventually list its Smithfield-Henan subsidiary on the Hong Kong Stock Exchange. This would allow Goldman Sachs and Singapore to cash out if they chose. Right now, their holdings are illiquid.

So any arguments in favor of this deal made by Goldman, management and shareholders are self-serving. U.S. Senator Debbie Stabenow articulated a better view.

"They are paying a 30% premium to buy it because they want to acquire 20 years' worth of food efficiency and safety systems to bring their systems up to standard," said Senator Debbie Stabenow of Michigan on air in June. "Our largest export market is Japan and the pork industry is very dependent on exports. China is beside Japan so American producers will lose market share there and elsewhere eventually."

Other questions include food safety and the inability to regulator foreign entities. Then there's the long run issue of viability as American expertise is bought then used against America. "We will lose this [pork and export] industry in long run," said Senator Stabenow.

Another red flag for Washington involves heparin, a blood thinner used in medical treatments mostly derived from pig's intestines. The US already gets 80 per cent of its heparin from China and this deal will give China a monopoly. The response by China is that they would not abuse their market dominance.

This is nonsense.

The U.S., the European Union and Japan have made official complaints to the World Trade Organization about China's hoarding and export restrictions on 17 metallic minerals essential to cutting edge technologies. China has ignored criticisms and continued to enforce quotas on such exports.

China also has a checkered past when it comes to workforce and managerial practices in developed countries. Incidents in Poland and Canada have been written by me over the years.

The strategy of China Inc. is obvious and it has made dramatic inroads into the corporate and economic landscape in developing nations too. By 2018, China will have a bigger economy than the United States, according to the most recent International Monetary Fund forecast. And this has been accomplished, in part, by their foreign strategy: enter foreign markets without giving up access to theirs.

So Smithfield Foods and the United States, which has kept China out of big buyouts thus far, is simply the next target.

This is not about protectionism or shareholder rights. This deal is about fair enterprise and creating a level playing field in a globalized world.

@dianefrancis1

dianefrancis.com

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