Secretive U.S. panel eyes China's Smithfield deal
The merger of Smithfield and Shuanghui must still be cleared by Smithfield shareholders and U.S. regulators, including the Committee on Foreign Investment in the United States.(Photo: 2009 AP photo by Steve Helber)
WASHINGTON — The fate of a Chinese company's controversial $4.7 billion purchase of U.S. pork giant Smithfield Foods could rest in the hands of a secretive and powerful government panel little known outside of the nation's capital.
The proposed takeover announced last month[1] of Virginia-based Smithfield, the world's largest pork processor and hog producer, by China's Shuanghui International Holdings has thrust the government's Committee on Foreign Investment in the United States (CFIUS) into the spotlight, highlighting the growing concern about U.S. companies being purchased by foreign entities.
The committee "only raises its head during controversy but the truth is it operates all the time even when people aren't hearing about it," said Josh Zive, a senior counsel at Bracewell & Giuliani who has represented several companies involved in the CFIUS process for more than a decade.
"The fact that (this merger) is being talked about in the context of CFIUS is indicative of how sensitive investors are with China in that you would want to get the review and approval of this out of the way, up front," he said.
The committee was given the authority in 1988 to review the impact that foreign purchases of American companies have on national security. CFIUS, which is headed by the Treasury secretary, includes members from the departments of Justice, Homeland Security and Energy along with five other agencies.
The government panel is notorious for operating in secret and is not permitted by law to talk about or comment publicly on any transaction, largely because of the sensitive information it is given to review. In 2011, the most recent year data from CFIUS (pronounced sif-e-us) are available, it reviewed 111 cases, and 10 of them were from China. The panel does not reject deals outright. Instead, it tells the companies it is going to recommend the president of the United States block their deal, which usually causes the parties to drop their proposed merger before the White House intervenes.
Most deals reviewed each year are in less controversial businesses and are approved without much difficulty, but on rare occasions mergers have been changed such as by requiring the merged operation to spin off a sensitive business.
In other cases, CFIUS can require that certain jobs only be given to U.S. citizens or that sensitive parts of the company be overseen by an American citizen who works closely with the government. A number of transactions have been abandoned in the face of CFIUS opposition, most notably China's Huawei which backed away in 2011 from its acquisition of U.S. cloud-computing company 3Leaf Systems after the panel suggested the Chinese company should divest assets in order to complete the merger.
Companies usually ask CFIUS to review their case, but in rare instances they can be told they have to file. Once a decision is reached, usually after 30 days, committee officials tell the businesses, who have the option of making it public.
Larry Pope, the chief executive of Smithfield, told investors after the deal was announced on May 29 that the company plans to file with CFIUS "out of an abundance of caution."
"That has a fairly speedy approval process and we don't expect -- we really don't expect much out of that either, but it is a requirement," Pope said.
The purchase of Smithfield would be the largest takeover of a U.S. company by a Chinese firm if shareholders and regulators approve the deal. Smithfield, founded in 1936, sells packaged products under popular brands including its own name as well as Farmland, Armour and Cook's. The company said it had grown about as big as it could in the mature U.S. market and a merger with Shuanghui would give it greater access to millions of consumers in China, South Korea, Japan and other Asian countries who are eating more meat.
Lawyers who have represented firms going through a review by CFIUS believe the panel's focus on national security should bode well for the Smithfield-Shuanghui deal. Transactions such as the purchase of a fighter-jet maker or a technology company making encryption software are just some of the examples that would likely raise a red flag with the committee, they said.
"I think they'll clear it," said Paul Marquardt, a partner based in the Washington, D.C., office of Cleary Gottlieb Steen & Hamilton. "I would be very surprised if this raised the kind of issues that CFIUS was concerned about."
But the secret proceedings of CFIUS can ultimately lead to uncertainty among those interested in the outcome of the deal since it's difficult for them to know what the panel members are thinking. This could leave open the possibility, albeit a small one, that the committee could find unexpected issues that would scuttle the deal or force the companies to make major concessions.
In controversial deals, CFIUS also must deal with opposition from Washington lawmakers concerned they could jeopardize national security. In 2005, widespread opposition on Capitol Hill forced China's state owned oil company, CNOOC, to abandon its $18.5 billion acquisition of California energy firm Unocal before CFIUS finished its review.
Lawmakers have already voiced concern over the Smithfield merger, citing Shuanghui's sale of pork two years ago that contained a banned feed additive and a series of other food-safety scares across China. They have questioned the impact of the deal on the safety of the U.S. food supply chain, an issue CFIUS is expected to look at during its review. "The agencies responsible for approving this possible merger must take China's and Shuanghui's troubling track record on food safety into account, and do everything in their power to ensure our national security and the health of our families is not jeopardized," said Sen. Debbie Stabenow, D-Mich., head of the Senate Agriculture Committee.
Those who have worked with CFIUS in previous cases say in the Smithfield deal the panel is likely to look at issues such as where the Smithfield plants are located in proximity to sensitive facilities like military bases where spying could be a concern. Ralls Corp., which is owned by two Chinese nationals, was ordered last year by President Obama to divest four wind farms located too close to a Navy weapons training facility in Oregon following a review by CFIUS that raised questions about the acquisition.
A disruption in food shipments to the U.S. military, which would likely depend on how much Smithfield meat is supplied to feed troops, also could be a concern if it was found to be significant, experts say.
"They may take that into consideration or they may laugh at that," said Sen. Chuck Grassley, R-Iowa.
Grassley said a sustainable food supply is critical to national security, and he urged CFIUS to investigate the role that the Chinese government plays in Shuanghui's operations.
"To have a Chinese food company controlling a major U.S. meat supplier, without shareholder accountability, is a bit concerning," Grassley said. "CFIUS' scrutiny of this acquisition is vitally important."