Who’s behind the Chinese takeover of world’s biggest pork producer?

JUDY WOODRUFF: One year ago this month, a Chinese company bought America’s largest pork producer, Smithfield Foods.  The $4.7 billion deal is the biggest Chinese acquisition of a U.S. company to date.

Nathan Halverson from the Center for Investigative Reporting looks into the Chinese government’s role in the takeover.  This story was produced as part of the Food for 9 Billion series, a collaboration between the Center for Investigative Reporting and Homelands Productions, with broadcast partners the “PBS NewsHour,” American Public Media’s “Marketplace” and PRI’s “The World.”

NATHAN HALVERSON: Pork pride is everywhere in Smithfield, Virginia.

This small town of 8,000 dubs itself the ham capital of the world.  Painted pigs line Main Street.  And at the taste of Smithfield Cafe, bacon graces nearly every plate.  The town’s museum even features the world’s oldest edible ham.  And some in town still produce ham as it was done generations ago.

MAN: We are curing hams the same way it was done during colonial times, Jamestown, Williamsburg, right on up to now.

NATHAN HALVERSON: The town is also home to the world’s largest pork producer, Smithfield Foods.  This factory processes more than 10,000 pigs a day.

MAN: We have got boneless loins, bone-in loins, butts, back ribs, spareribs, neck bone, cushions.  We have got an assortment of everything.

NATHAN HALVERSON: And this is going all over the country?

MAN: All over the world.

NATHAN HALVERSON: Here, every employee from secretaries to the CEO learns how to properly butcher a pig.  A year ago, news broke that stunned the town.  Chinese buyers had purchased Smithfield Foods.

MAN: That was the issue when it was announced.  It just shocked the town.  Nobody saw it coming.

MAN: Another foreign deal causing chatter, if not national security concerns.

WOMAN: Smithfield agreeing to be acquired by China’s Shuanghui International.

MAN: A Chinese company today offering nearly $5 billion.

MAN: If approved, it would be a largest Chinese takeover of any American company.

MAN: Questions are being raised about why China wants our pigs.

NATHAN HALVERSON: The takeover raised concerns the Chinese government was a hidden player in the deal.  Some members of Congress wondered why Shuanghui group would pay more than Smithfield’s market value.

SEN. DEBBIE STABENOW, (D) Michigan: The Chinese paid a 30 percent premium.  Very interesting.  Not exactly the best business deal, so what’s really going on here?  What really is it that this merger, this purchase, was all about?

NATHAN HALVERSON: Senator Debbie Stabenow heads the Senate Agriculture Committee.  She says food is a strategic resource that should be as important to the U.S. government as oil.

SEN. DEBBIE STABENOW: This isn’t just an acquisition of a company.  It’s 25 percent of the pork industry in the United States.

NATHAN HALVERSON: Stabenow worried that the Smithfield takeover could signal a long-term threat to the vital American food industry.

SEN. DEBBIE STABENOW: This is a precedent-setting case.

NATHAN HALVERSON: As the U.S. government reviewed the deal, Stabenow called a Senate hearing to take a deeper look at the first Chinese purchase of a major American food company.

MAN: This is really all about control.

NATHAN HALVERSON: Daniel Slane, a congressional adviser who receives classified China briefings from the CIA, warned of Chinese government involvement.

DANIEL SLANE, U.S.-China Economic and Security Review Commission: They have told their domestic industries, like Shuanghui, go out and find these companies and acquire them.  And, in effect, American companies are not competing with a Chinese company, but with the Chinese government, and they can’t win that competition.

NATHAN HALVERSON: Larry Pope, president and CEO of Smithfield Foods, said this was simply the case of one private company buying another.

MAN: Would you agree that Shuanghui is a state-controlled company?

LARRY POPE, CEO, Smithfield Foods: No, I wouldn’t agree, Senator, that it is a state-controlled company.  I think the — I think that’s fairly easy to research.  So, I would just ask Mr. Slane to do the research.  And maybe he’s just got some bad information.

NATHAN HALVERSON: Some senators even laughed off Slane’s remarks.

MAN: Did you realize you were the victim of a Chinese communist plot?

(LAUGHTER)

LARRY POPE: Senator, I didn’t — to this moment, I’m not sure I understand I’m the victim of a communist plot.

MAN: And the control of your company somehow…

(LAUGHTER)

NATHAN HALVERSON: In his written testimony, Pope said the Chinese government has absolutely no ownership stake or management control in Shuanghui.

DANIEL SLANE: He’s either lying or he’s delusional, one or the other.  I just don’t think he understands the situation.  And you can’t expect him to be a China expert.  His job is to do what’s in the best interest of the shareholders.

NATHAN HALVERSON: The Treasury Department approved the deal last September.  A special committee, which meets behind closed doors to evaluate foreign purchases of American companies, reviewed the acquisition to assess whether it posed a threat to national security, focusing on military defense.

Since Treasury’s final report is classified, the Center for Investigative Reporting spent four months determining if the Chinese government played a role in the takeover.

Carl Sanchez, the American lawyer who brokered the deal for Shuanghui, says the Chinese government’s bank, the Bank of China, approved the $4 billion loan to buy Smithfield in a single day.

Bank of China is — it’s owned by the government.  So if the government has an initiative, and they want to go forward with it, the advantage is, is that they can support that.

CARL SANCHEZ, Lawyer for Shuanghui: Sure.  We had our financing all lined up.  We were ready to roll.  We were ready to sign that agreement.  We were ready to provide commitment letters from the banks for about $5 billion in financing altogether.

NATHAN HALVERSON: In its annual report, the Bank of China highlights the Smithfield takeover, calling it their social responsibility and saying it spares no effort to support Chinese enterprises in their international competition.

We asked Sanchez directly about the Chinese government’s role in the deal.

CARL SANCHEZ: So that part of the transaction, I’m not sure I can comment on.  I would have to check with the client first before I could comment on that.

NATHAN HALVERSON: So, to find out more, we went to China, where a rapidly growing middle class is eating more meat every year, pushing the country’s pork production to the limit.

At factories like Shuanghui’s, the government has established massive pork reserves, akin to oil reserves in the U.S., to store millions of pounds of frozen meat.

NATHAN HALVERSON: In 2011, the government issued a five-year plan directing food companies such as Shuanghui to obtain more meat for their production lines by purchasing overseas businesses.  We went to Shuanghui’s headquarters in Luohe, China.

ZHANG TAIXI, President, Shuanghui: Welcome to Shuanghui.

NATHAN HALVERSON: Thank you for having us.  It’s a pleasure.

ZHANG TAIXI: Thank you.  Thank you.

NATHAN HALVERSON: We got a tour of the company from Zhang Taixi, president of Shuanghui.  Zhang, like other senior management at Shuanghui, was appointed to his position by the Chinese government.

How supportive was the Chinese government of Shuanghui’s purchase of Smithfield Foods?

ZHANG TAIXI (through interpreter): Very supportive.

NATHAN HALVERSON: How did the Chinese government support this deal?

ZHANG TAIXI (through interpreter): The Chinese government has been supporting us with preferential policy, as well as investment.  For instance, the Bank of China has shown great support both financially and politically.

NATHAN HALVERSON: And why has the government given so much support?  Because Shuanghui, according to its own documents, is required to carry out China’s five-year plan.  In effect, the Chinese government does exercise management control.

We went back to Smithfield CEO Larry Pope, who is now an executive with the Chinese company, to ask whether he stands by his testimony to Congress.

LARRY POPE: I have never seen a government official related to this transaction from China at all.

NATHAN HALVERSON: We showed Larry Pope the Bank of China annual report that details their role in the Smithfield acquisition.

This is the Bank of China document where they lay this out.

LARRY POPE: I didn’t know they did it in 24 hours.

NATHAN HALVERSON: You can see here — I just mark it — I mean, they’re saying that that transaction is part of the government’s plan, and they are supporting it and it’s their social responsibility.

LARRY POPE: Wow.  “The bank performs its social responsibility.  The bank spares no efforts to support Chinese enterprises.”

Wow.

NATHAN HALVERSON: How do you compete with that?

LARRY POPE: It’s hard.  I don’t think I could go out today and get the U.S. government to support making a $4 billion loan as a social responsibility for Smithfield to move forward on a foreign — on a foreign country’s territory.  No, I don’t think that’s doable in any industry that I can think of.

NATHAN HALVERSON: Sanchez, the lawyer for Shuanghui, says the Bank of China is set to fund many more Chinese takeovers.

CARL SANCHEZ: I definitely think that the Shuanghui-Smithfield deal was a litmus test for Chinese-U.S. deals, very large Chinese-U.S. deals.

I can tell you firsthand that this has paved the way for other deals.  We are now looking at a few other very large transactions for Chinese clients looking at other iconic brands in the United States.

NATHAN HALVERSON: Senator Stabenow said that, if the Chinese government has a global food agenda that includes purchasing American food companies, the U.S. government should provide strategic protection for its food industry.

SEN. DEBBIE STABENOW: Food security is national security.  And I can’t imagine that the American people will feel comfortable if they wake up someday and find that half of our food processors are owned by China.  And I think there are some very, very tough questions that need to be answered.

NATHAN HALVERSON: Stabenow is now drafting legislation that would require the Treasury Department to take a much harder look at foreign takeovers of American food companies.

JUDY WOODRUFF: And one footnote:  The Chinese company Shuanghui in the story has officially changed its overall name to W.H. Group, but it still retains the name and use of Smithfield Foods for that brand of products since the deal was completed.