Will meat manufacturer deal trigger more Chinese investment into US? Elizabeth Broomhall reports

The acquisition of American pork producer Smithfield Foods by Hong Kong-based meat manufacturer Shuanghui International Holdings came at a good time for Hong Kong's corporate lawyers. 

Last year's $7.1bn (£4.2bn) deal was the largest ever takeover of a US business by a Chinese company and was announced just as a host of law firms were focusing their energies on Chinese outbound investment. 

When it came to choosing their advisers, it was no surprise that both Shuanghui and Smithfield picked US firms with which they had long-term relationships. Wall Street firm Simpson Thacher & Bartlett was appointed lead counsel on the US side, having advised Smithfield since the turn of the century, while Paul Hastings was selected by Shuanghui, having assisted it on restructuring, offshore activities and other transactions since 2003. 

But previous experience of working with the protagonists would not relieve the firms of the challenges associated with such a large deal. According to Paul Hastings corporate partner Vivian Lam, who worked on the transaction alongside lead partner Raymond Li, there were several issues that could not have been anticipated. "A lot of things you don't know until you've got your hands dirty working on them," she explains. "It was an eye opener for us as to how you take care of all these different requirements."

The first challenge was managing a lengthy due diligence process – primarily a job for Paul Hastings. 

Key considerations for the firm included potential FCPA (Foreign Corrupt Practices Act) issues, making the deal tax efficient for Cayman Islands-registered Shuanghui and clarifying future obligations under trade union agreements. The last of these was especially important given that about half of Smithfield's 45,000-strong workforce was unionised.

"There was a period when we had a due diligence call every night for a week or so," says Lam. "Before that it was every two to three days, but it was intense. Every night when we had our calls we had more than 50 parties online from everywhere, each looking at a different piece of the puzzle."

Even thornier, adds Lam, were the antitrust and regulatory issues, particularly as the deal needed approval from regulators across several jurisdictions in which Smithfield operated. "One of the very sensitive discussions was what antitrust approvals we needed to get before we signed," she says. "There were also various jurisdictions where we didn't have offices so we needed to instruct local lawyers to help us do the filings; for example in Poland and Russia."

Meanwhile, for Simpson Thacher, the bulk of the work at this stage involved responding to requests for information. "From our side, it was a case of providing that diligence, helping on the financial front and the legal front," explains the lead partner on the deal, New York-based Robert Spatt. 

"Paul Hastings came to our offices in New York at one point for the better part of a week, and there were about 30 or 40 people here – bankers, lawyers and business people."

The process was complicated further by the presence of three bidders, he adds. It then became crucial to put into place a covenant, which would allow Smithfield to terminate an agreement if a higher price was offered. "One of the bidders was above the price that Shuanghui was talking about, and so we tried to set a forward date for all bidders to put in final offers," says Spatt.

"I got a call [from Shuanghui] at midnight on the Friday, saying if we didn't sign the deal by 6pm on Tuesday they'd be out of there – here are the terms.

"Of course there were negotiations of those issues but one of the more creative things we had to deal with was how we could get comfortable [doing the deal earlier]."finishing-farm-web

Subsequently, the firm came up with new terms, which would allow Smithfield to continue to solicit the other two bidders until the deal was signed, and, if in the 30 days that followed it received a higher price, it could terminate the Shuanghui deal for half the normal break-up fee. 

For both firms, another significant hurdle related to the Committee on Foreign Investment in the US (CFIUS). Primarily concerned with US national security, approval from CFIUS was vital for the deal to close.

"CFIUS operates privately – they don't explain decisions to you, so you don't know your chances," says Lam (pictured, below). "Shuanghui is a Chinese company so we expected huge amounts of scrutiny, but if the company asks us 'do you think we can get through?' it is impossible to determine in the beginning because you have to analyse a lot of things that at that time we didn't have information on." 

As an example, she says Smithfield operated thousands of farms in 25 US states, making it difficult to assess whether any of these farms were near sensitive US military installations, and indeed whether Smithfield had any contracts with Government or military-related companies. In the past CFIUS has rejected Chinese acquisitions for similar reasons. 

"We had our CFIUS team spending days and nights with the company trying to strategise on what we thought the questions would be and what our answers would be in advance. We had many people on the US side involved with this."

Spatt adds: "We all knew CFIUS was going to be an issue. Both sides had significant teams, and we spent a lot of time being proactive with the regulators. Ultimately it blossomed into a very sensitive political situation – there was a Senate committee in our Congress and they ran televised hearings where our senior management had to go and testify. 

"One of the main issues was food safety – what would be the impact of the Chinese buying the biggest pork supplier in the world?"

Back around the negotiating table, Simpson Thacher in particular faced further obstacles. Chief among these was the risk of non-closure, and the concern that, should Shuanghui change its mind about the deal, the contract would not be enforceable in China given that Shuanghui was a private foreign company.  

"We created a series of reverse break-up fees to solve these issues," explains Spatt. "That was really important to us and our board because we needed to know we had access to a significant pool of money."

Under the terms of the deal, Shuanghui paid $275m (£166m) into an escrow account in New York, which it was liable to pay to Smithfield should the company back out due to a lack of financing, failure to get regulatory approvals outside the US or if it changed its mind for any other reason. Had Shuanghui not obtained CFIUS approval, it did not have to pay the fee, but was obligated to take any action necessary to get the go-ahead.

The deal was agreed on 28 May, subject to regulatory and shareholder approval. But that wasn't the end of the sleepless nights for legal counsel. 

For Simpson Thacher, worries that the deal could collapse at the last minute resurfaced after the signing when one shareholder – the Starboard Value Fund – recommended that others vote against it, claiming it would be more worthwhile to sell the company off in pieces, an option Smithfield had previously ruled out.

"They didn't drop out until the Friday before the shareholder meeting in September," says Spatt. "It meant that instead of feeling as though it was a done deal you always had to worry about whether something was going to happen. 

"So it did keep us on our toes and we had to be in a position to advise Smithfield in case they showed up 24 hours or 48 hours before the meeting with some kind of proposal that could cause us to delay it."vivian-lam-web

With the Starboard Value Fund onside shortly before the meeting, the deal was approved by shareholders on 24 September. There was, however, one last scare after a super typhoon hit Hong Kong, causing the city – where all of the funding banks were located – to shut down for a day. 

"There was a risk that pre-funding was going to get delayed," explains Spatt. "I started getting emails from the Paul Hastings side saying it's going to close down for days and we were going to miss our window. I started calling people in the middle of the night at our offices in Hong Kong to see what they were hearing." 

Had the city closed for longer than a day, Paul Hastings had contingency measures in place to deal with the consequences. In the end, the one-day shut-down did not delay pre-funding, and the deal was duly completed on 27 September.

In hindsight, Spatt says these kinds of problems only make the work more interesting. Furthermore, a track record of advising on the specific challenges associated with outbound Chinese investment will no doubt earn the firms involved a stronger reputation when it comes to advising on future transactions.

"This deal has significance for Chinese companies generally," concludes Lam. "In the Chinese papers it was said to have opened the door for Chinese companies to invest in America. So we absolutely anticipate getting more deals of this kind."

Deal timeline

March 2013

  • Smithfield Foods' largest shareholder, Continental Grain, recommends splitting the company into three. Simpson Thacher & Bartlett appointed to advise Smithfield.
  • Shuanghui's financial adviser, Morgan Stanley, presents offer to Smithfield. Paul Hastings and Simpson Thacher appointed as lead counsel, advising Shuanghui and Smithfield respectively. Troutman Sanders appointed to act for Shuanghui on Virginia aspects of the deal (where Smithfield is headquartered), with McGuireWoods advising Smithfield on the same.

May 2013

  • Shuanghui agrees to buy Smithfield for $4.7bn (£2.8bn), subject to regulatory and shareholder approval.

June 2013

  • Hedge fund Starboard Value Fund opposes deal in letter to shareholders. 

September 2013

  • Allen & Overy (advising banks including Bank of China, Rabobank, Credit Agricole and Royal Bank of Scotland) and Paul Hastings close Shuanghui financing deal, which sees company secure $4bn (£2.6bn) in debt. 
  • Shuanghui hires Simpson Thacher senior associate Sandra Kister as its new general counsel to oversee the deal.
  • Shareholders approve takeover. Deal valued at $7.1bn (£4.2bn), including debt.

November 2013

  • Shuanghui appoints Paul Hastings to advise on Hong Kong IPO. Cleary Gottlieb Steen & Hamilton appointed for the banks.

January 2014

  • Paul Hastings advises Shuanghui on tie-up with Mexican food company Sigma Alimentos, advised by Linklaters. The deal is a joint bid for share control of Spanish processed-meat business Campofrio Food Group, which Shuanghui inherited from Smithfield.

For more, see International firms aim to cash in on Chinese companies' appetite for outbound M&A deals.