Remember the five little piggies that went to market? Anyone counting the banks employed in the Hong Kong listing of WH Group (the world’s largest pork producer), would soon run out of toes – and fingers. There are 29 of them involved, a world record. The spread of the company’s operations may have resulted in a myriad of banking relationships, but certainly not any divisional coherence.
The deal has a couple of private equity elements. Shuanghui, the Chinese pork giant, last year bought Smithfield of the US for $7bn including debt to form the bulk of WH Group. It has private equity investors who will sell down in the float. The company could also profit in a quick flip from the implied valuation of Smithfield. Take out WH Group’s Shuanghui original businesses plus its private logistics arm and, at the lower valuation of $15.1bn implied by its price range, Smithfield fetches $4.5bn. This is a so-so 12 per cent bump to the $4bn Shuanghui paid for the equity in September before debt. But at the high, $21.2bn, end of the deal’s wide price range, Smithfield would be worth $10.6bn.
China and the US are top two in terms of producing and consuming pork and WH Group leads at both in each country. Pork consumption globally may grow slowly but China’s low per-head consumption leaves room for faster growth. Moreover, US brands can win over Chinese consumers wary of local names following food scares. So there is potential. But first the company must prove this cross-border deal worked. A Chinese company running a US food producer, given the rules that bind that industry, makes success tricky. For that reason, those 29 banks should aim to price this towards the lower end of the range. Investors will be taking risks and deserve to be left some early upside.