Setting the scene
Shuanghui International is China’s largest pork producer. Paul Hastings represented Shuanghui in a US$7.1 billion deal to acquire the biggest U.S. pork processor and hog producer, publicly-traded Smithfield Foods. The deal – announced in May 2013 and completed in September 2013 – is the largest acquisition of a U.S. company by a Chinese company to date, and has garnered enormous attention in political, press, and industry circles.
In early September 2013, the deal reached a key milestone, when the parties received clearance from the Committee on Foreign Investment in the United States (CFIUS). Shuanghui also secured US$4 billion in debt financing from a consortium of banks comprising Bank of China, Rabobank, Credit Agricole, DBS, Natixis, The Royal Bank of Scotland, Standard Chartered Bank and Industrial & Commercial Bank of China. In addition, Shuanghui, through its U.S. affiliate, raised US$900 million of public bond financing in connection with the deal.
The deal is arguably one of the most challenging and innovative deals of the year, not only due to its size and breadth, but also because of several structuring elements devised to bring the deal together, including a time-sensitive offer, a “qualified pre-existing bidder” provision, a unique alternative debt financing structure, and a strategic approach to the CFIUS review process.
Time Sensitive Offer
A key element of the deal was making Shuanghui’s offer time-sensitive. We devised a creative strategy to help get the deal signed and to avoid a potential bidding war, while at the same time providing Smithfield’s board with the fiduciary latitude it needed to accept our client’s offer. We delivered a draft merger agreement to Smithfield’s counsel on May 13 and received the company’s comments 11 days later on May 24. At that time it became known that at least two other bidders had approached Smithfield. So on the same day we received Smithfield’s response, we delivered Shuanghui’s response to Smithfield’s counsel - a revised draft of the merger agreement, marked up to achieve a quick agreement and an ultimatum: if the parties did not reach agreement and sign the merger agreement by 6:00 p.m. Eastern Time on May 28, Shuanghui’s offer would be withdrawn and Smithfield potentially would be left without a deal.
Qualified Pre-Existing Bidders
Another interesting element was the creation of a “qualified pre-existing bidder” provision. This provision allowed Smithfield to continue discussions with the two existing bidders for a period of 30 days from the date of signing the merger agreement with Shuanghui. The provision differed from the standard “go-shop” because it did not permit Smithfield to actively “shop” the company by seeking additional bidders, but restricted Smithfield’s discussions to the two existing bidders. The merger agreement also contained a customary no-shop provision which generally prohibited Smithfield from entering into negotiations with other persons, subject to customary fiduciary outs.
The deal also featured a unique alternative debt financing structure that was not originally considered when the deal was signed. Our team worked with Shuanghui, Smithfield and their advisors on the deal financing to optimize Smithfield’s post-closing debt capital structure. This presented an unusual challenge. Our lawyers had to put in place the new alternative financing, without affecting the existing committed financing available to Shuanghui or financing certainty. Effectively, we had to structure two parallel financing plans to achieve the objectives. In addition, our lawyers, working with Shuanghui’s financial advisors, tapped the U.S. debt markets to raise US$900 million of financing to help fund the acquisition.
Two-Tier Smithfield Termination Fee
In addition to the “qualified pre-existing bidder” provision, the merger agreement also provided for a two-tier company termination fee, with a reduced termination fee payable in the event a deal was transacted with one of the two pre-existing bidders. Specifically, if Smithfield terminated the merger agreement with Shuanghui to pursue a transaction with one of the two pre-existing bidders within 30 days of signing the merger agreement with Shuanghui, the termination fee would be US$75 million. This is significantly lower than a typical company-side break-up fee, and US$100 million less than the ultimately agreed upon company-side break-up fee of US$175 million that would have been payable by Smithfield if any other potential transactions took place or if there was any transaction with the two existing bidders more than 30 days after signing the merger agreement.
No CFIUS Risk for Shuanghui
Another interesting aspect of the deal offered Smithfield protection through a reverse break-up fee. Under the terms of the merger agreement, Smithfield would receive US$275 million from Shuanghui if the deal fell apart because it failed to secure certain U.S. or foreign regulatory approvals, but this provision excluded CFIUS clearance. Specifically, because of the intense political interest anticipated for this transaction and the fact that certain previous acquisitions of U.S. companies by Chinese companies have been blocked by CFIUS, Shuanghui was unwilling to agree to pay a reverse break-up fee should CFIUS block the transaction. Shuanghui’s refusal to bear CFIUS risk was an unusual aspect of the deal.
The deal was seen as a significant test of whether the CFIUS review process can be applied fairly to Chinese investment in the U.S., in light of several high-profile rejections of past deals. Passing this test not only paved the way for the two companies to consummate the transaction, but should foster goodwill between China and the U.S. and may encourage more companies and finance parties that the U.S. is increasingly welcome to Chinese investment. CFIUS’s approval thus represents an important turning point for the flow of investment between China and the U.S.
This substantial and high-profile Chinese investment in a U.S. publicly-traded company, in the politically-sensitive food and agricultural sector, required careful navigation. The CFIUS process, while theoretically separate from politics, invariably is influenced by a host of political considerations. We had to manage this charged political climate, and we worked closely with Smithfield’s advisors to reach out to constituents on Capitol Hill, the Administration, state and local governments, unions, employees, shareholders, and commentators. So the CFIUS process was not only a political challenge, but a “diplomatic” endeavor of communicating and reassuring stakeholders at every level of seniority. Shuanghui received CFIUS approval of the transaction on September 6.
Our proactive approach ensured that the deal was evaluated on its merits as a merger driven by economic fundamentals, including growing pork demand in China, and not depicted as a strategy to export pork to the U.S. or otherwise permit a Chinese “takeover” of the U.S. food supply. We also addressed antitrust concerns by demonstrating that it doesn't give Smithfield ‒ already the world's largest hog farmer and pork producer ‒ a larger share of the U.S. pork market.
The Shuanghui/Smithfield transaction is, by a long measure, the most talked-about and focused-upon acquisition of the year.