UPDATE: Bank of China to Provide $4 Billion of Financing for Shuanghui's Buy of Smithfield - Sources

(Adds dollar value of financing Bank of China is providing in second paragraph.)

 
   By Prudence Ho, Cynthia Koons and Isabella Steger 
 

The Chinese pork producer making the $4.7 billion bid for Smithfield Foods Inc. (SFD) is getting funding for the deal from one of the country's top banks, as well as Morgan Stanley (MS), according to people with knowledge of the deal.

The New York branch of Bank of China Ltd. (BACHY, 601988.SH, 3988.HK), the smallest of China's top four state-owned lenders, is providing $4 billion of financing to Shuanghui to cover most of the acquisition cost of buying Smithfield, said two people close to the deal. Those loans by Bank of China, which has a longstanding relationship with Shuanghui International Holdings Ltd., are secured against the Chinese pork producer's assets in China. Morgan Stanley, which is advising Shuanghui on the takeover, meanwhile is providing funding secured against Smithfield's assets in the U.S., the people familiar with the deal said.

The deal is the biggest-ever acquisition by a Chinese firm of a U.S. company, and the involvement of one of China's banks is not surprising. Chinese banks have been eager to support the country's big companies as they have ventured abroad, in particular for deals involving natural resources and other industries deemed crucial to the country's growth.

Such a structure will protect both banks because if Shuanghui can't repay its debt, Bank of China has the domestic network in China it can employ to claim the pork producer's assets. A foreign lender like Morgan Stanley would have a tough time getting access to Chinese assets due to foreign exchange restrictions, said one of the people familiar with the deal.

Morgan Stanley is providing around $3 billion in loans, using Smithfield's assets as collateral. Its loan will cover Smithfield's current debt, including convertible bonds and loans held by the U.S. maker of sausages and other pork products, a person familiar with the situation said. Including debt, the deal by Shuanghui, also known as Shineway, values Smithfield at $7.1 billion.

"There is some overlap, but basically, Morgan Stanley is covering the existing debt of Smithfield, while Bank of China is covering the acquisition cost," said the person.

Bank of China, also China's largest foreign-exchange bank, has been more aggressive in pushing into the U.S. market compared with its peers. For example, it became the first Chinese bank last November to participate in the sale of commercial mortgage-backed securities, or CMBS, in the U.S. It is also one of the biggest foreign lenders to commercial real estate in the U.S., particularly in New York.

Smithfield and Shuanghui have had a number of talks over the years, but it wasn't until March that Shuanghui decided it was interested in buying the company, bringing in financial and legal advisers to study how a bid might be structured, people familiar with the matter said.

At the end of March, Shuanghui submitted an initial bid, phoning the U.S. company with an offer, according to the people. By mid-April, the two sides signed a non-disclosure agreement, a contract that prevents the relevant parties from sharing confidential information about negotiations. After that, Shuanghui started reviewing due diligence materials that had been uploaded to a virtual data room.

During the week of May 13, Shuanghui and its advisers flew to New York, where they met Smithfield's management team face-to-face. There were presentations and question-and-answer sessions, followed by a site visit to Smithfield, Va., home to the company's headquarters and a company packing plant just outside of town, one of the people familiar with the transaction said.

Last week, "things moved very quickly", the person said. The company decided to make its move and got the financing commitments in place from Morgan Stanley and Bank of China. Shuanghui arrived at the final bid of $34 a share after "a few rounds" of negotiations. The person said that the $34 bid was higher than the initial bid made at the end of March, as "even though Smithfield was a public company, there was a lot of information that was clearer after the NDA was signed."

Smithfield was under pressure at the time to boost shareholder returns. Just last month, ContiGroup Cos., a New York-based agribusiness and financial-services company that is one of Smithfield's biggest shareholders, said management was "destroying shareholder value" and urged the pork producer to sell underperforming assets and add three new directors.

Shuanghui, however, was adamant in the acquisition process that it wanted Smithfield's management to stay on after the deal was done, one of the people familiar with the situation said. Part of the appeal of buying the U.S. firm for Shuanghui was to help bring better food-safety practices to China, the person said. China's food industry has been tainted by a series of scandals involving milk, rice and pork. As recently as March, thousands of dead pigs were found floating a river outside of Shanghai.

Write to Prudence Ho at [e-mail], Cynthia Koons at [e-mail] and Isabella Steger at [e-mail]

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