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U.S. pork processor Smithfield Foods, Inc. has announced that the Committee on Foreign Investment in the United States (CFIUS) will carry out a second phase 45-day review of the proposed merger of Smithfield with Hongkong-based meat processor, Shuanghui International Holdings Ltd, pursuant to the Exon-Florio legislation.

Per the legislation, the Committee is in charge of reviewing foreign acquisitions made by U.S. companies for potential national security concerns. The 30-day review period starts from the time a potential acquisition is reported. Following the end of the 30-day period, CFIUS can exercise its option to extend the term to a maximum of another 45 days.

The deal was signed on May 30, whereby Shuanghui agreed to acquire all of the outstanding shares of Smithfield for $34.00 per share totaling $7.1 billion, including Smithfield’s debt. The deal will allow Smithfield to expand its footprint in China taking advantage of Shuanghui's solid distribution network. As far as Shuanghui is concerned, it will be able to meet the growing demand for pork in its domestic market by gaining control of Smithfield’s brands, such as Smithfield, Armour and Farmland that meet food safety standards.

However, the transaction is yet to receive shareholder and related federal regulatory approvals. The main concern for U.S. regulators is that the deal should not jeopardize the American food supply chain and harm the entire U.S. pork industry as they do not find Shuanghui’s food safety practices in China acceptable.

Smithfield’s CEO has assured that the transaction will have no impact on U.S. food supply. The company will continue to produce pork maintaining highest food safety standards and abide by the U.S. regulations. In addition, Smithfield stated that it will continue its contracts with more than 2,000 family farmers even after the merger. Smithfield believes that the deal will create an opportunity for U.S. hog farmers to expand production.

Smithfield also assured U.S. regulators that there will be no change in the company’s management team and all the employees of Smithfield will be retained, following the completion of the deal. Virginia will continue to remain the headquarters of Smithfield and C. Larry Pope will carry on in his responsibilities as the company’s president and CEO.

Both Smithfield and Shuanghui International have agreed to cooperate with CFIUS and will not divulge details during the review period. Both the companies expect the transaction to close in the second half of 2013.

We note that Smithfield’s results have been suffering since the last few years as a result of higher grain costs and declining pork demand. In addition, oversupply of hogs has resulted in lower hog prices, which along with higher grain costs lowered margins. This deal will prove to be a boon for Smithfield as it will provide opportunities to increase the presence of its brands in China. It will also be able to meet the rising demand for pork in China, which accounts for about 50% of the world's pork consumption.

Smithfield holds a Zacks Rank #3 (Hold). Meat producers like Pilgrim’s Pride Corp (PPC - Snapshot Report), Sanderson Farms Inc (SAFM - Snapshot Report) and Tyson Foods Inc (TSN - Analyst Report) are better placed and are worth considering. While Sanderson carries a Zacks Rank #1 (Strong Buy), Tyson and Pilgrim’s Pride hold a Zacks Rank #2 (Buy).

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