CHAPTER 6
THE BUTCHER
The best time to plant a tree was twenty years ago. But the second best time is today.
—Chinese proverb
Ultimately valued at $7.1 billion, the takeover of Smithfield Foods by Shuanghui International Holdings is the largest acquisition of an American company by Chinese buyers in history. It is not an impulse purchase. It has been in the works for seven years, ever since the king of the hog kings, Joe Luter, sat down in his Park Avenue living room with Wan Long, “China’s Number One Butcher,” and said, with the self-assurance of a man comfortable on the throne: “We ought to do something together.” Dominating the pork markets in North America and Europe is not sufficient for Luter. He imagines an empire on which the sun will never set.
In the land of the Red Dragon, however, his bold notion of conquest meets an ancient and mercurial wall—Chinese politics. No friend of foreign control in domestic business, the Communist Party is especially touchy about agriculture. In China, pork is not only a favored source of dietary protein; it is a pillar of the country’s food security. Just as the United States maintains a strategic oil reserve to guard against price hikes and fuel the nation in an emergency, China holds a strategic pork reserve to prevent supply shortages and forestall civic unrest.
And Shuanghui is the keeper of that reserve.
Like da Vinci’s flying machine, the grandest of Joe Luter’s visions finds a more ready home in the world of dreams. Wan, the Chinese magnate, is justly curious about the idea of a planetary joint venture, but he resists the overtures of his brash American suitor until the politics of pork in China merge with the business metrics. It is then that Wan turns Luter’s favorite phrase—“capital seeks opportunity”—on its head.
In March of 2013, he makes a play for Smithfield Foods.
Born in 1940, Wan grew up in Henan province, an agricultural region in the Yellow River valley three hundred miles west of Shanghai. For a young man of ambition, it was at once a perilous and propitious time to be alive. The country was in the midst of a vast upheaval. China’s civil war was over, the nationalist leaders exiled to Taiwan, and Mao Zedong’s Communist revolution was underway. At the age of nineteen, during the Great Leap Forward—Mao’s ill-fated quest to rapidly industrialize the hinterlands—Wan joined the Red Army and was dispatched to western China, where he built and repaired railroad tracks.
After soldiering for a number of years, he returned home to the city of Luohe and took an office job at a state-owned slaughterhouse, one of the smallest in the province. Over the course of the next two decades, he impressed his colleagues with his leadership and administrative acumen, and in 1984, they offered him the helm of the enterprise, electing him their manager. Like Wendell Murphy and Joe Luter, who were in the thick of their empire-building during the 1980s, Wan took advantage of relaxed regulations and a fecund economic climate in China to grow the business into a national powerhouse, exporting its products to Russia and Israel. He was the first meatpacker in China to sell pork in the Western manner, using a brand name. That brand was Shuanghui, which means “double gathering”—a kind of auspicious convergence, a meeting blessed with fortune.
The way his friends tell it, Wan never stopped working. He pushed Shuanghui to the frontier of productivity to gain an edge, just as Wendell Murphy did with his feed mill. He was a capitalist, a dealmaker, a new breed of Chinese businessman who welcomed foreign investment and ignored the backlash from domestic critics. Twenty years after he assumed control of Shuanghui, he engineered a buyout of the government’s stake with financing from a Chinese private equity firm and Goldman Sachs. As much as he chafed at the shackles imposed by the provincial bureaucracy, he played by the rules of the Communist Party, currying favor with powerful men and harnessing their beneficence to his advantage. In the late 1990s, those provincial elites elected him to serve in China’s National People’s Congress, a national parliament somewhat like Britain’s House of Lords. The election was a peerage of sorts. It meant that Wan Long, the country boy from Henan, was now a baron of the realm.
In 2011, luck smiled on him again. In its twelfth Five-Year Plan, the central government shined a spotlight on food insecurity and encouraged the purchase of farmland overseas. Chinese investors responded by going on a buying spree, increasing China’s stake in U.S. farmland by 1,000 percent by the end of 2012, along with acquiring immense acreage around the world. The Five-Year Plan also encouraged investments in biotechnology and allocated huge subsidies to support it. With such a directive from the central government, it was only a matter of time before the world saw a Chinese agricultural company make a record-setting pass at a U.S. competitor.
That milestone arrives in March 2013, the very same month that Mona Wallace takes up the banner on behalf of the neighbors down east.
When the call comes in to Smithfield’s headquarters in March, an investment banker from Morgan Stanley is patched through to the C-suite overlooking the placid waters of the Pagan River. Joe Luter, however, is no longer there to pick up the phone. He is enjoying a posh retirement in Palm Beach and Aspen, while still serving as Smithfield’s chairman of the board and spiritual Yoda. His longtime CFO and protégé, Larry Pope, is sitting in the spacious chief executive’s suite.
A fresh-faced southern boy with a can-do esprit and a mathematical mind, Pope cut his teeth at Smithfield retooling all of Luter’s bargain-basement meatpacking acquisitions into viable company assets. Unlike Luter, he is not a trailblazer. He lacks the relentless moxie, the sangfroid, and the impenetrable obstinacy of his predecessor. He is instead a polished and capable manager, skilled at converting other people’s prototypes into functional products.
For a while now, Pope has been obsessed with Luter’s idea of breaking into the Chinese export market. China consumes half the world’s pork. Its rising middle class has developed a taste for meat at every meal. Yet it has only 7 percent of the world’s farmland. America, on the other hand, is a hog producer’s heaven, with Big Ag efficiencies and farm acreage to spare. But consumers in Boston and San Francisco have a more tepid view of the “other white meat” than consumers in Shanghai. While bacon is almost universally beloved, other products like baby back ribs, barbecue, and pork belly are mostly regional crowd-pleasers. Even the choicest cut, the pork tenderloin, all gusseted and garbed by the best farm-to-table chefs, is less popular than the same cut of beef. In short, what the U.S. has in supply, China has in demand.
A partnership with Shuanghui could be a bonanza for Smithfield.
And God only knows how much the company needs it. Its share price has been on a five-year slide, thanks to a punishing run of bad luck. First, the subprime mortgage crisis sent the economy into a tailspin and Smithfield’s stock into the single digits. Then, only months later, reporters traced a global outbreak of “swine flu” (H1N1) to a Smithfield-allied hog farm in Vera Cruz, Mexico (though later testing found no evidence of the virus in the herd). After that came a spike in the price of feed, as ethanol producers horned in on America’s corn stock, converting it to biofuel. Now, with the company’s shares struggling to regain their pre-recession value, one of Smithfield’s mouthiest investors has been agitating to break up the company’s production and processing divisions, effectively unwinding Joe Luter’s crowning achievement.
Pope has been in talks with Wan Long about an investment arrangement in which each company would purchase a minority stake in the other. He knows how connected Wan is to China’s brass. One of Shuanghui’s investors is the son of China’s outgoing premier, and the man who is about to replace him is the former party secretary of Wan’s own Henan province, a man who helped Wan remove a barrier to Shuanghui’s expansion back in 2004. With Wan’s influence in Beijing, Smithfield might finally gain access to the country’s consumer market.
Larry Pope is totally unprepared for Wan’s counterproposal: a full buyout of Smithfield.
At first, Pope takes umbrage and says that Smithfield isn’t for sale. But the offer, when it comes, is mind-bogglingly generous. Wan has taken the U.S. company’s market capitalization of just under $5 billion (the outstanding value of its shares) and raised it by 30 percent. His offer of $7.1 billion is too enticing for Smithfield’s shareholders to refuse. Even Joe Luter reluctantly concedes that the merger is the right move. It is the apotheosis of the old hog king’s vision of total vertical integration—from feed to fork, on a global scale. It is also a brilliant coup. What he did to Wendell Murphy, Wan Long has done to him.
The only question is whether the U.S. government will approve the union.
The Shuanghui takeover bid raises a host of prominent eyebrows in Washington, D.C. It is not just the inflated offer price that gives economists, intelligence analysts, and politicians pause. It’s China’s strategy of foreign investment. In industry after industry—steel, paper, glass, auto parts, and solar energy—the Chinese have used a spiral-drill approach to undercut foreign competitors. In the first turn of the bit, they leverage government subsidies and sweetheart loans to acquire intellectual property and technological innovation from countries like the U.S. In the second turn, they combine that imported tech with low-cost Chinese labor to manufacture products at a lower price. Finally, in the third turn, they export those cheaper products back to U.S. consumers, capturing market share from U.S. companies and triggering wage depression and job losses among American workers.
To any sophisticated observer, it’s obvious why Wan Long and his compatriots are enamored of Smithfield. The hog giant’s genetics and feed technology are light-years beyond those of China’s hog producers, many of which are still raising pigs like their ancestors did in small farms on the ground. Moreover, Smithfield’s processing machinery is far more efficient than Shuanghui’s. Once Wan owns the American tech, he will surely deploy it back home, updating his own slaughterhouses to roll out high-end processed pork products to compete with U.S. companies on the export market.
There’s something else, too—a finer point, but no less troubling. The cost of raising a hog in North Carolina is about half that of raising a comparable hog in China. In part, that is the result of industrialization—Wendell Murphy’s CAFO revolution. But it’s also due in no small measure to North Carolina’s extraordinarily lax waste disposal regulations. Hogs in China urinate and defecate just as much as hogs in America, but the Chinese government doesn’t allow its hog farmers to use lagoons and sprayfields. It has invested in treatment facilities for wastewater, digester systems that convert manure into biogas for heating and electricity generation, and biological odor control systems to protect neighbors. When it comes to managing hog waste, China is a paragon of progress, and North Carolina is a backwater of pollution.
As soon as word gets out about the merger, senators on Capitol Hill call for a public hearing. Chuck Grassley, the Iowa Republican, raises the specter of Chinese Communist Party influence in the takeover. Is Shuanghui a puppet of Beijing? Debbie Stabenow, the Democratic chairwoman of the Senate agriculture committee, summons Larry Pope to testify. She also calls three experts to join him—Usha Haley, a professor of business at West Virginia University; Matt Slaughter, a Dartmouth academic and fellow at the Council on Foreign Relations; and Daniel Slane, a security analyst serving on the U.S.-China Economic and Security Review Commission.
The hearing takes place on July 10 in an ornate, wood-paneled room in the Dirksen Senate Office Building. With a menagerie of aides, journalists, and policy geeks looking on, Larry Pope settles into the hot seat. The restive senators give him a grilling. Like a veteran diplomat, the Smithfield CEO ducks and dodges, defending the transaction as a boon to U.S. consumers and not a Chinese food and technology grab. When Sherrod Brown, the Democrat from Ohio, asks him how much he stands to benefit from the transaction, Pope crafts a pair of non-answers that run down the clock on Senator Brown. The answer, as reported by Reuters, is $46.6 million—a number that would not have played well in the hearing room.
Eventually, Senator Pat Roberts of Kansas gets a turn at the microphone. Since Kansas is one of America’s largest feed-producing states, Roberts is sympathetic to the merger. He lobs a softball question at Pope, asking why Smithfield voluntarily submitted the transaction to the interagency Committee on Foreign Investment in the United States, which reviews the national security implications of investments from abroad. Pope gives the ball a proper whack. Smithfield did it because it’s a good corporate citizen, because it wants the transaction to be transparent.
Roberts then tees up the question he’s really wanting to ask: “Did you realize you were the victim of a Chinese Communist plot?”
Pope laughs aloud, as does half the gallery. “Senator,” he replies, humor dancing in his eyes, “to this moment I’m not sure I understand that I’m the victim of a Communist plot.”
There’s just one problem with this exchange: It obscures an unsettling truth. The Chinese government is, indeed, an animating spirit behind the Smithfield buyout. It takes some legwork by the Center for Investigative Reporting to reveal the particulars, but when the light breaks in, all doubts are dispelled. The state-owned Bank of China financed the merger with a $4 billion loan that it approved in a single day. Even more tellingly, while Shuanghui has its headquarters in Hong Kong and its shares are listed on the Hong Kong stock exchange, it does not exercise ultimate authority over its own business decisions. It is obligated to follow the Five-Year Plan.
The journalist who broke the story, Nathan Halverson, received confirmation of this from Wan Long’s own son, Robert Wan, in the hushed precincts of the Shuanghui chairman’s corner office, seventy-six stories above Victoria Harbour in Hong Kong. In Robert Wan’s words:
The Chinese government acts like a de facto board of directors, even for publicly traded companies like Shuanghui. The Communist Party issues the five-year plan, and Shuanghui is expected to follow that direction. The government can say it wants the Chinese meat industry to employ certain strategies, and all domestic companies are expected to adhere. Yet the day-to-day management of the company, how it chooses to carry out those directives, is left to the company’s management.
So when Larry Pope tells the U.S. Senate in July 2013 that “the Chinese government has absolutely no ownership stake or management control in Shuanghui,” he is being either naïve or duplicitous. Beijing is the ghost in the machine, an inescapable presence.
When the hearing adjourns, Smithfield’s merger plans proceed apace, as if the way ahead is unobstructed. Final clearance authority rests in the hands of the inter-agency committee, with heavy influence from Treasury, but no one really believes the outcome is in question. Americans love mergers, especially those that promise benefits to consumers and job growth, and, in the context of agriculture, there is no recognized limit to the salutary effects of size.
Uncle Sam is sure to give a thumbs-up.
The announcement lands on September 6, two weeks after Don Butler rallies Smithfield’s growers at the Sampson County Expo Center and vows to fight the nuisance suits to the bitter end. Three weeks later, on September 26, the historic deal closes, and Shuanghui assumes command of a hog empire that spans the globe.