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China Showing Surprising Interest in the U.S. Stock Market Food Sector

Stock-Markets / Sector Analysis Jun 03, 2013 - 06:23 PM GMT

By: InvestmentContrarian


George Leong writes: Over the past few years, we have seen an increase in takeover activity in North America’s stock markets by China-based companies. The takeover targets have largely been in the energy and resources areas, where China is in search of alternative sources of raw materials.

In 2009 and 2010, Chinese energy firms made about $48.0 billion in stock market acquisitions in North America, according to the International Energy Agency (IEA). China has major investments in the oil-rich Canadian tar sands in Alberta, and I expect to see more Chinese capital flowing into the North American stock market.

The biggest takeover in the stock market from a Chinese company to date was the $15.1-billion takeover of Canada-based Nexen Inc. (TSX/NXY) by CNOOC Limited (NYSE/CEO) in February 2013.

I was aware that the Chinese strategy to accumulate raw materials globally via the stock market would continue, but I was quite surprised to hear about the proposed takeover of the world’s largest pork producer, U.S.-based Smithfield Foods, Inc. (NYSE/SFD) by China’s largest pork producer, Shuanghui International Holdings Limited in a $7.1-billion deal. At issue is not the takeover price, since it was 31% above the closing price of the prior day, but it was more due to the surprise that China is interested in America’s food sector.

While it was obvious that the Chinese want oil and minerals investments in the stock market, the fact that China is moving into this country’s food sector might become an issue.

The Smithfield deal could represent the largest takeover of an American company in the stock market by a Chinese company and the second-largest after the Nexen deal in Canada. However, the deal must first be cleared by The Committee on Foreign Investment in the United States, which, in 2005, ruled against the Chinese takeover of U.S.-based oil company Unocal. But this Smithfield deal is different, since pork is not considered a security safeguard like oil or technology.

On the surface it may seem like the Chinese want access to the much higher quality U.S. pork, which is likely the major reason for the proposed deal, given the recent stories we have heard about the inconsistent quality of pork in China. For this reason, the Smithfield deal makes sense for Shuanghui.

Of course, the fear is that the deal would open the way for pork to flow into the United States from China despite the fact that Shuanghui is telling us that would not happen. If this is true, then it could be a good deal for Smithfield and its workers, who would have access to the American company’s pork products and could ship them to the massive Chinese market, where pork is the top meat consumed.

“The acquisition provides Smithfield the opportunity to expand its offering of products to China through Shuanghui’s distribution network,” said Shuanghui Chairman Wan Long. (Source: “Shuanghui International and Smithfield Foods Agree to Strategic Combination, Creating a Leading Global Pork Enterprise,” Smithfield Foods web site, May 29, 2013.)

It will be interesting to see if the takeover is approved, because it could set in play more takeovers in the stock market from Chinese companies down the road in areas such as food and agriculture—areas where demand is surging in China and where there is no national security risk to America.

Yet I couldn’t imagine a Chinese company buying Hormel Foods Corporation (NYSE/HRL) in the stock market, unless, of course, the Chinese love eating “SPAM.”


George Leong, B.Comm.

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