Goldman Lost Deal Role Due to Stake in Shuanghui

Goldman Sachs Group Inc. (GS) lost a role on one of the most significant merger-and-acquisitions deals this year--the sale of Smithfield Foods Inc. (SFD) to China's Shuanghui International Holdings Ltd.--due to its investment in Shuanghui, according to people familiar with the matter.

Goldman was forced to relinquish a role it had been promised advising Smithfield on a sale of the company when the Virginia company learned that Goldman owns a stake in Shuanghui, according to people familiar with the matter. Shuanghui announced late last month that it would acquire Smithfield, the world's largest pork processor, for $4.7 billion. If completed, it would be the biggest-ever acquisition of a U.S. company by a Chinese company.

Smithfield learned about Goldman's investment in Shuanghui, held through an investment subsidiary of the bank, early in the talks that led to the deal with Shuanghui and was taken by surprise by the development, the people said. Smithfield kept Goldman as an advisor limited strictly to shareholder activism.

The episode is latest example of Goldman, considered one of the most formidable investment banks on Wall Street, stumbling over potential conflicts in deals. Goldman officials, including current Chief Executive Lloyd Blankfein, have long said that conflicts are a fact of life in the securities business but that the firm manages them effectively.

In addition to the embarrassment such situations can cause a firm, they can also cost real money. Barclays PLC, which served as Smithfield's adviser on the Shuanghui deal, likely earned a hefty fee measured in the millions if not tens of millions of dollars for its work.

Before the deal was announced, Goldman had been advising Smithfield on how to react to a big shareholder, Continental Grain Co., which had been pushing for a breakup of the company, according to people familiar with the matter. That assignment entitled Goldman to a role advising Smithfield should the company be sold, according to a public filing Smithfield made on the deal Tuesday. Smithfield alluded to the situation in the filing, without naming the bank, but the "financial advisor" it mentions is Goldman, the people familiar with the matter said.

"Smithfield became aware that the financial advisor that had been retained with regard to shareholder activism issues, through one of its affiliates, had a relationship with" Shuanghui, the filing says. It says Smithfield determined that it would be inappropriate for the Goldman to provide advice on the sale.

Write to Sharon Terlep at [e-mail]

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