The Deal: Smithfield Deal Eyed For Food Safety Conditions

NEW YORK ( The Deal) -- National security officials have extended their review of the proposed $7.1 billion takeover over of Smithfield Foods ( SFD) by China's Shuanghui International Holdings, raising the prospect that the deal will face mitigation conditions related to food safety.

Smithfield announced Wednesday, July 24, that the Committee on Foreign Investment in the United States has extended its review of the company's proposed $7.1 billion takeover by Shuanghui and will conduct a second-phase 45-day investigation of the deal. The investigation would wrap up around Sept. 9, after which CFIUS could clear the deal, approve it with conditions or recommend that President Obama block it.

When the merger plans were announced in May, Washington regulatory experts predicted there was little chance CFIUS would block the deal because it didn't raise the military, physical infrastructure and law enforcement concerns that fall under the security panel's purview. And, earlier this month, U.S. antitrust regulators declined to launch a formal review of the deal.

But lawmakers and others have warned it could pose a threat to U.S. food safety if the deal results in Shuanghui products being imported into the U.S. China has been plagued by several high-profile food safety incidents in part because of regulatory shortcomings in that country.

"News of Shuanghui International's proposed purchase of Smithfield Foods, the largest purchase of a U.S. company by a Chinese firm, raises so many questions," Senate Agriculture Committee Chairwoman Debbie Stabenow, D-Mich., said at a July 10 hearing examining the deal. "This is a precedent-setting case and we owe it to consumers, producers and workers to ensure we are asking the right questions and evaluating the long-term implications."

Stabenow, along with Mississippi's Thad Cochran, the Agriculture Committee's ranking Republican and other members of the panel, have urged Treasury Secretary Jack Lew, the head of CFIUS, to include the Department of Agriculture and the Food and Drug Administration in the review to ensure that food safety is considered.

And perhaps the Smithfield deal will offer national security regulators an opportunity to create a framework for reviewing deals that affect food security. Farhad Jalinous, a partner in the CFIUS practice at Kaye Scholer, said CFIUS's view of national security is broadening and it is possible that CFIUS could impose mitigation conditions addressing food safety as part of its approval of the deal. "That we would end up with mitigation conditions in connection with a Chinese investment in one of our largest suppler of a key food would not surprise me at all," he said.

Smithfield CEO Larry Pope has insisted a takeover by Shuanghui poses no threat to U.S. consumers because it will not result in imports coming here from China. He also told the Senate Agriculture Committee at the July hearing that China is determined to improve its food safety oversight and the acquisition of Smithfield will help make that happen. "Shuanghui sought out Smithfield because of our industry-leading standards," he said. "Nothing is more important to Shuanghui than the quality and safety of its food products. Shuanghui, whom we have partnered with for years, has worked to implement new, stringent food safety protocols and standards in China, and is constantly improving its standards of safety. Teaming up with Smithfield will only strengthen the safety of the global food supply chain."

But Usha Haley, director of West Virginia University's Robbins Center for Global Business and Strategy, said that although it might be that no China-raised hogs will be exported to the U.S., it's likely Shuanghui eventually will ship processed products such as lunchmeat and sausages here and that Chinese oversight is not sufficient to ensure the safety of food the company sends to the U.S.

Written by Bill McConnell.