The Chinese pork producer making the $4.7 billion bid for
Smithfield Foods Inc. (SFD) is getting funding for the deal from
one of the country's top banks, as well as Morgan Stanley (MS),
according to people with knowledge of the deal.
The New York branch of Bank of China Ltd. (BACHY, 601988.SH,
3988.HK), the smallest of China's top four state-owned lenders, is
providing loans to Shuanghui to cover most of the acquisition cost
of buying Smithfield, said two people close to the deal. Those
loans by Bank of China, which has a longstanding relationship with
Shuanghui International Holdings Ltd., are secured against the
Chinese pork producer's assets in China. Morgan Stanley, which is
advising Shuanghui on the takeover, meanwhile is providing funding
secured against Smithfield's assets in the U.S., the people
familiar with the deal said.
The deal is the biggest-ever acquisition by a Chinese firm of a
U.S. company, and the involvement of one of China's banks is not
surprising. Chinese banks have been eager to support the country's
big companies as they have ventured abroad, in particular for deals
involving natural resources and other industries deemed crucial to
the country's growth.
Such a structure will protect both banks because if Shuanghui
can't repay its debt, Bank of China has the domestic network in
China it can employ to claim the pork producer's assets. A foreign
lender like Morgan Stanley would have a tough time getting access
to Chinese assets due to foreign exchange restrictions, said one of
the people familiar with the deal.
Morgan Stanley is providing around $3 billion in loans, using
Smithfield's assets as collateral. Its loan will cover Smithfield's
current debt, including convertible bonds and loans held by the
U.S. maker of sausages and other pork products, a person familiar
with the situation said. Including debt, the deal by Shuanghui,
also known as Shineway, values Smithfield at $7.1 billion.
"There is some overlap, but basically, Morgan Stanley is
covering the existing debt of Smithfield, while Bank of China is
covering the acquisition cost," said the person.
Bank of China, also China's largest foreign-exchange bank, has
been more aggressive in pushing into the U.S. market compared with
its peers. For example, it became the first Chinese bank last
November to participate in the sale of commercial mortgage-backed
securities, or CMBS, in the U.S. It is also one of the biggest
foreign lenders to commercial real estate in the U.S., particularly
in New York.
Smithfield and Shuanghui have had a number of talks over the
years, but it wasn't until March that Shuanghui decided it was
interested in buying the company, bringing in financial and legal
advisers to study how a bid might be structured, people familiar
with the matter said.
At the end of March, Shuanghui submitted an initial bid, phoning
the U.S. company with an offer, according to the people. By
mid-April, the two sides signed a non-disclosure agreement, a
contract that prevents the relevant parties from sharing
confidential information about negotiations. After that, Shuanghui
started reviewing due diligence materials that had been uploaded to
a virtual data room.
During the week of May 13, Shuanghui and its advisers flew to
New York, where they met Smithfield's management team face-to-face.
There were presentations and question-and-answer sessions, followed
by a site visit to Smithfield, Va., home to the company's
headquarters and a company packing plant just outside of town, one
of the people familiar with the transaction said.
Last week, "things moved very quickly", the person said. The
company decided to make its move and got the financing commitments
in place from Morgan Stanley and Bank of China. Shuanghui arrived
at the final bid of $34 a share after "a few rounds' of
negotiations. The person said that the $34 bid was higher than the
initial bid made at the end of March, as "even though Smithfield
was a public company, there was a lot of information that was
clearer after the NDA was signed."
Smithfield was under pressure at the time to boost shareholder
returns. Just last month, ContiGroup Cos., a New York-based
agribusiness and financial-services company that is one of
Smithfield's biggest shareholders, said management was "destroying
shareholder value" and urged the pork producer to sell
underperforming assets and add three new directors.
Shuanghui, however, was adamant in the acquisition process that
it wanted Smithfield's management to stay on after the deal was
done, one of the people familiar with the situation said. Part of
the appeal of buying the U.S. firm for Shuanghui was to help bring
better food-safety practices to China, the person said. China's
food industry has been tainted by a series of scandals involving
milk, rice and pork. As recently as March, thousands of dead pigs
were found floating a river outside of Shanghai.
Write to Prudence Ho at Prudence.Ho@wsj.com, Cynthia Koons at
Cynthia.Koons@wsj.com and Isabella Steger at
Isabella.Steger@wsj.com
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