Another day, another major acquisition of a U.S. firm by a Chinese company. The $4.7 billion deal announced today in which China’s Shuanghui Group has agreed to buy the world’s biggest pork producer, Smithfield, is the largest such transaction to date, and nearly double the price paid last year by Dalian Wanda to acquire the U.S. movie theater company AMC. But in every other respect it is just another in a growing string of large, and only moderately controversial, Chinese purchases of U.S. firms.
What the bid suggests is that Chinese companies are finally figuring out that, in most sectors, the U.S. economy is far more open to Chinese investment than they had believed. Of the ten largest Chinese purchases to date, all but two have taken place in the past two years, in sectors as diverse as hotels, auto parts, and aviation lease financing. While all were subject to scrutiny by the U.S. government’s Committee on Foreign Investment in the United States (CFIUS), none posed insurmountable hurdles.
The Smithfield deal will face a CFIUS review as well, but in all likelihood it will raise no issues. The pork business is hardly one that waves strategic red flags. And from a trade and commerce perspective, it looks like a winner. U.S. companies, including Smithfield, have long faced an array of irritating obstacles selling U.S. pork to China, which is the largest market for pork and pork products in the world. Many of those should become easier to navigate with a Chinese company in charge. And Smithfield’s shareholders, who had been agitating for a sale, are likely to be happy with the $34 per share offer price, a 31 percent premium over Tuesday’s closing share price.
For Shuanghui, which has agreed to leave Smithfield’s staff and operations intact, the deal should help bring higher standards to the Chinese pork industry, which has been beset by a series of scandals including sales of tainted pork and the dumping of dead pig carcasses into rivers.
Many Chinese companies have long been frustrated by the U.S. security review process, begging U.S. officials to offer them a clear roadmap to which sectors were open for Chinese investment and which were closed. The U.S. government has never offered such a roadmap, but the sheer accumulation of deals is starting to suggest that one exists.
Telecommunications is off-limits (see anything involving Huawei), as are any investments that bring a Chinese company anywhere near a U.S. military installation (see Ralls and windfarms). But many other sectors appear more or less wide open. The growing number of acquisitions by privately-owned Chinese enterprises, rather than state-owned companies, is also an encouraging trend. Thilo Hanemann of the Rhodium Group noted last month that private Chinese companies have spent more on U.S. deals in the past 15 months than they did in the previous 11 years. Shuanghui was a state-owned company, but was taken private in a 2006 share offering that was open to foreign investors.
Given the growing U.S. concerns over Chinese cyber-espionage, however, CFIUS appears to be circling the wagons even tighter around the telecommunications sector. The committee this week gave its approval to the $20.1 billion takeover of Sprint, the U.S. telecoms firm, by Japan’s Softbank, putting aside a political campaign by rival Dish Network to quash the deal on national security grounds. Dish had enlisted several senators and run full-page ads claiming the takeover would threaten U.S. security, hoping to force Softbank to withdraw from the fight. A similar political campaign in 2005 by Chevron succeeded in forcing China’s National Offshore Oil Corporation (CNOOC) to withdraw its $18.5 billion bid for Unocal. CNOOC learned its lessons, however, by moving slowly and taking a series of minority stakes in U.S. oil firms, and recently won CFIUS approval for the acquisition of the U.S. assets of Nexen, the Canadian oil and gas firm, though with unspecified conditions.
In concluding the deal to acquire Sprint, Softbank agreed to an unusually aggressive set of conditions set by CFIUS. According to Reuters and the Wall Street Journal, Softbank agreed to remove all Huawei hardware from Sprint’s networks by 2016, and to install a government oversight committee that will have a veto over future equipment purchases.
These are all encouraging signs that the U.S. government is focusing on genuine security threats, while holding out an “open for business” sign for other deals. That will be good for both the U.S. and Chinese economies.