Lemon Pork: Smithfield for sale again

Hong Kong holding company WH Group plans to publicly list its U.S.-based Smithfield Foods subsidiary, according to a plan proposed to the Hong Kong stock exchange. After buying up all Smithfield's shares at a premium in 2013--thus removing it from the NYSE--WH Group may have some buyer's remorse. Its Chinese boss may be hoping to generate another payday from investors excited by stories of U.S.-China pork synergies and worldwide distribution. (Smithfield it will still be a subsidiary of WH Group after a public listing.)

WH Group's 2013 acquisition of Smithfield enriched its Chinese boss, his cronies, and venture capital bros from Wall Street, Hong Kong and Singapore. At the time WH's Chinese billionaire boss, Wan Long, made a vague statement about melding the Chinese subsidiary's extensive distribution network with Smithfield's production technology and safety standards to create a global meat supplier, but the rationale for that acquisition was never clear...and none has really emerged in the 11 years since. In fact, financial pressures are forcing WH Group to slim down its pork assets in both the United States and China.

According to the apocryphal story, Wan Long resuscitated a slaughterhouse in an obscure Chinese city during the 1980s and '90s to create a Chinese company called Shuanghui, known for its sausages sold in plastic wrappers. That company, now called Shuanghui Development, is the other major holding of WH Group. 

According to China's Blue Whale Finance, WH Group never successfully integrated Smithfield with its Chinese company's system. Shuanghui built a processing plant modeled on Smithfield's U.S. operations soon after the acquisition. During the African swine fever epidemic when hog supplies were tight in China, Smithfield retooled a plant in Virginia to cut pork carcasses in half to ship to the Shuanghui plant. American style bacon, lunch meats, etc were test-marketed in China but results were not encouraging. There have been no apparent synergies from combining the two companies. 

The U.S. National Farmers Union opposed the Smithfield deal in 2013, sending a letter to the Treasury Secretary warning that Shuanghui's "access to unlimited credit from the Chinese state bank" would lead to Smithfield taking over the U.S. market. In fact, the loan WH Group got from the Bank of China was only short-term and was meant to tide the company over until its Hong Kong IPO the year after the Smithfield deal. Smithfield actually has become a cash drain for the Chinese company, which may be the motivation for relisting Smithfield. 

Wan Long's eldest son strongly opposed the Smithfield acquisition, arguing that billions of dollars spent on capital expenditures at Smithfield slowed the development of the Chinese pork business. In a 2021 article Wan's son wrote, "[WH Group's] role is to transfer Shuanghui's money abroad without leaving any trace through various dazzling financial means and complex structures. It has never flowed back in the opposite direction." [translation by google] 

The younger Wan also disagreed with dad's shift in business strategy toward selling American-style pork products. He also accused his father of pocketing shares from the Hong Kong IPO of WH Group meant for employees. The disagreement reported led to a physical altercation in 2021, and the younger Wan was booted out of the company.

Caijing New Media points out that pork market cycles in the U.S. and China--historically out of phase--have synced up over the last few years with pork markets in both countries going into simultaneous tailspins. Caijing attributes the downspin in China to excess production while weak demand has driven the decline in the U.S. market. 

Data from USDA and China's Ministry of Agriculture and Rural Affairs show that productive sow inventories have fallen in both countries since 2021. Indexing quarterly sow numbers to their June 2021 peak shows that U.S. sow herd has shrunk 5.7% since then and China's sow herd has shrunk 12.2% as of June 2024.

Decrease in quarterly sow numbers from their peak in June 2021
calculated from USDA and China Ministry of Agriculture data.

Blue Whale reports that financial pressures pushed WH Group to close poorly managed farms in 2022. A plan called for cutting its pig production from 15 million in 2023 to 10 million in 3 to 5 years. 

Another Chinese financial news outlet said WH Group closed its processing facilities in California in May 2022 and sold them off in 2023. It sold a specialty food business and unloaded its interest in a Mexican production and processing operation. It reorganized its pig farming business in Missouri and Utah. Meanwhile, it made new acquisitions in Europe as a diversification strategy.

WH Group reported a sharp decline in Smithfield profits during 2023 due to weak demand. Caijing described Smithfield as a relatively serious drag on WH Group's performance. 

WH Group's first quarter 2024 revenue was down 8.3% year on year. 

According to Caijing, WH Group's stock price opened higher on July 15th after announcing the Smithfield spin-off, but the gains were erased by the end of the day.