Smithfield Buyout Still Secure Despite Closer Scrutiny

Smithfield Buyout Still Secure Despite Closer Scrutiny

We survived Lenovo buying IBM's PC business. Amazingly (some might say distressingly), California didn't fall into the sea when Dalian Wanda bought movie theater chain AMC Entertainment earlier this year. The lights didn't go out when Suntech Power bought power conversion specialist EI Solutions a few years back.

Yet somehow the very foundations of democracy are seen to be at stake because a Chinese company wants to buy pork processor Smithfield Farms . Suddenly, Congress is holding hearings over its national security implications, and the deal is now undergoing a second round of scrutiny.

I'm not immune to the concerns over what would happen if some of our more sensitive technology got into hands of some of our trading partners. There were likely very good reasons behind U.S. opposition to companies working with Chinese telecoms Huawei Technologies and ZTE (Congress says they might turn the technology around to spy on us).

It's hard to fathom, though, how our pig-farming practices can be weaponized. Shuanghui International isn't a state-controlled enterprise like CNOOC, which tried and failed to buy oil producer Unocal (it was subsequently sold to Chevron). It's an arm of China's biggest pork producer and most likely it wants to learn our processing techniques to bring stability to their own production.

Two years ago, now-bankrupt AgFeed Industries bought U.S.-based pork processor M2P2 along with Kansas City Sausage and Pine Ridge Farms in an attempt to implement Western-style hog farming practices and stave off collapse (they had even hired a former McDonald's executive). It was a dispute with Hormel earlier this year, however, that caused it to default on its debt covenants and sent it scrambling for bankruptcy protection.

Demand for pork in China outstrips demand anywhere else in the world. Between 1975 and 2012, demand for pork was relatively flat in the U.S. and the USDA expects it to fall this year, but China has seen demand rise 6% annually over the same time frame and its per-capita pork consumption has surged by 25% in the past decade, reaching 86 pounds in 2012, while accounting for half of all the world's pork consumption.

Being able to adopt U.S.-style practices and bring more abundant pork to its people is what's driving this deal, not international espionage. Our food security is not threatened by Smithfield being a Chinese-owned company, because it's just not going to stop selling pork products in the U.S. Nor do we have to worry about tainted pork coming into the country because we supposedly already have the Agricultural Dept. monitoring our borders. Continued enforcement of our standards should be enough to prevent any spoiled meat making it to the supermarket shelves.

While it's definitely not a two-way street with U.S. investment in China, blocking a Chinese company from purchasing a U.S. business for jingoistic reasons or xenophobic fears is not proper policy, either. Besides, as I noted the other day, Smithfield's business has been failing lately, generating a negative return of 18% over the last five years.

Shuanghui International is paying more than $7 billion, a 31% premium, for a floundering meat company, putting the bloat in the bid on the order of Haier's pursuit of Maytag a few years back. In that case, it sought to buy up the troubled washing machine company for $1.3 billion before thinking better of it (Whirlpool ended up paying $1.7 billion). Yet despite Haier being a government-owned company, there were no congressional hearings on the risks to our national sovereignty over an influx of Chinese clothes washers.

While Smithfiled is the largest U.S. producer, with about a 28% share of the market, Tyson Foods is second at 17%, generating $1.3 billion in sales last quarter, though that's down 4% from last year. Hormel saw lower operating margins over the first half of the year as well.

In the end, the congressional hearings likely won't scuttle the deal, because the claims of national security issues are bogus. But off-year posturing can still harm trade relations long term, and investors -- and consumers -- benefit from it.

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Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Chevron and McDonald's. It owns shares of IBM and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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