The Deal: Smithfield Deal Likely to Clear National Security Review

NEW YORK ( The Deal) -- Shuanghui International Holdings is expected to receive clearance from national security regulators for its planned $7.1 billion acquisition of Smithfield Foods ( SFD). An announcement of the approval could come from the companies as early as Friday.

The investigation of the deal by the Committee on Foreign Investment in the U.S. is scheduled to close Friday. China-based Shuanghui announced Tuesday that it had put in place $4 billion in debt financing for the acquisition, a clear indication that the company is confident that it will win CFIUS approval. Smithfield revealed on July 24 that CFIUS had extended its review of the deal from the initial informal 30-day review to a second-phase, 45-day investigation that would run through Sept. 6.

The debt package is a facilities agreement with Bank of China Ltd., Cooperatieve Centrale Raiffeisen-Boerenleenbank BA (also known as Rabobank International), Credit Agricole Corporate and Investment Bank, DBS Bank Ltd., Natixis Global Asset Management SA, Royal Bank of Scotland Group plc, Standard Chartered Bank (Hong Kong) Ltd. and Industrial & Commercial Bank of China (Asia) Ltd.

"The investors wouldn't participate in a financing this size unless they were given some pretty strong assurances the deal would close," said Farhad Jalinous, a partner in the CFIUS practice at Kaye Scholer LLP.

CFIUS experts are examining the review to learn whether the panel insists on mitigation conditions aimed at ensuring that sound safety practices are carried out on Smithfield and other Shuanghui pork that ends up being processed in China and imported to the U.S. The Smithfield deal could provide national security regulators an opportunity to create a framework for reviewing deals that affect food security. Such conditions would be a first -- CFIUS typically addresses military, physical infrastructure and law enforcement issues posed by a foreign company's takeover of a U.S. asset.

Critics have urged the U.S. government to scrutinize the deal for threats to the U.S. food supply because of China's poor track record in food safety. Although executives from the two companies insist that the purpose of the deal is to export Smithfield products to China, some opponents predict that Smithfield hogs will find their way back to the U.S. in the form of processed lunchmeat and other products.

China has been bedeviled by instances of food and toothpaste tampering, including a 2007 scandal in which melamine-tainted pet food exported to North America killed thousands of pets. In March, thousands of dead pigs washed ashore in Shanghai.

The concerns even extend to pharmaceuticals. In a July 24 letter to Smithfield CEO Larry Pope, House Energy and Commerce Committee Chairman Fred Upton, R-Mich., and other senior Republicans on the panel noted that Smithfield is a major producer of the basic ingredient for heparin, a blood-thinning drug administered to 12 million Americans annually following heart surgery and for dialysis treatment. The Food and Drug Administration has blamed the 2008 deaths of at least 81 people in the U.S. and 785 serious injuries on a heparin raw ingredient that was processed in China.

Because of these concerns, Jalinous said it is easy to imagine CFIUS requiring Shuanghui to implement food safety measures on any products that could end up in the U.S. as a term of approval. Others have suggested that the U.S. government stipulate terms on inspections of Shuanghui facilities that manufacture food products for export here and to require country of origin labels on processed food shipped here.

Written by Bill McConnell

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