Smithfield: How Sausage Was Made; Joseph W. Luter III transformed his family’s firm into a global giant

Updated June 5, 2013, 8:14 p.m. ET

Smithfield: How Sausage Was Made

‘Seeds Were Planted’ 7 Years Ago, Luter Says, When He Suggested Joint Venture to Shuanghui Chair

By DAVID KESMODEL

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Joseph W. Luter III transformed his family’s firm into a global giant

It was a brief meeting of the two most powerful people in pork. The encounter between Joseph W. Luter III, chairman of Smithfield Foods Inc.,SFD +0.33% the world’s largest pork processor, and Wan Long, chairman of Shuanghui International Holdings Ltd., known as “China’s No. 1 Butcher,” lasted only 90 minutes about seven years ago. Hosting Mr. Wan in his Manhattan apartment, Mr. Luter floated the idea of a joint venture, saying “we ought to do something together.” And that laid the foundation, Mr. Luter said in an interview this week, for a very different tie-up: last week’s $4.7 billion deal for Shuanghui to buy Smithfield in the biggest Chinese takeover of a U.S. company. “Seeds were planted,” the 73-year-old Mr. Luter said, “and sometimes it takes a while for seeds to germinate.”The deal that blossomed marks a stunning conclusion to the Luter family’s stewardship of Smithfield, and it reflects big changes in the global meat industry. Mr. Luter’s father and grandfather co-founded the meatpacker in 1936 in Smithfield, Va., and he transformed it into a global giant by engineering more than 50 acquisitions over three decades.

Along the way, Mr. Luter earned a reputation as a no-nonsense businessman with expensive tastes that have included posh homes on Manhattan’s Park Avenue and in Aspen, Colo. He was also a fierce defender of the pork industry in the face of criticism from animal-rights activists and environmental groups, acquiring nicknames in the media like “Boss Hog” and the “Hog King.”

The proposed takeover is an acknowledgment by Mr. Luter and other Smithfield directors that the company’s growth prospects at home are constrained by sluggish sales in a mature and consolidated market, while China offers vast opportunities as the rising wealth of its people fuels increasing demand for pork and other meats.

“I have always thought that something big should happen between China and the United States,” Mr. Luter said. “There’s too much pork in the U.S. and too little in China.”

The deal remains subject to a national security review by the Committee on Foreign Investment in the U.S. And Mr. Luter said that other bids could still emerge.

Brazilian meatpacker JBS SAJBSS3.BR -0.43% and Thailand’sCharoen Pokphand Foods PCL, CPF.TH -0.89% known as CP Foods, have also looked at Smithfield, according to a statement by CP Foods last week and people close to JBS. Shuanghui’s side didn’t learn that CP Foods and JBS were interested until about a week before Shuanghui signed its deal, said a person familiar with the matter. Shuanghui responded by accelerating its efforts “quite a bit,” the person said, and at one point it even intimated that it would drop out of the process if the deal wasn’t signed in a certain time frame.

But JBS isn’t currently entertaining a topping bid, according to people familiar with the matter. And Shuanghui doesn’t expect either party to top its bid, said another person familiar with the matter, who added that Shuanghui’s Mr. Wan would likely top other bids should they appear. Shuanghui and JBS representatives declined comment.

Messrs. Luter and Wan, growing up on opposite sides of the world, both helped turn modest regional meatpackers into industry giants.

Mr. Luter’s start came on the kill floor and loading dock at his family’s company during summers between semesters at Wake Forest University. His father died when he was a senior, and Mr. Luter bought out non-family investors to become CEO in 1966 at the age of 26.

Mr. Luter sold out three years later to Liberty Equities Corp. and was soon pushed out. He used his money from the deal to start a Virginia ski resort, but after Smithfield began to founder, directors brought him back in 1975.

Mr. Luter began snapping up weaker pork companies. In the 1980s and 1990s, he borrowed a strategy from the chicken industry, developing and buying up hog farms so that Smithfield could control each stage of pork production.

As Smithfield grew, Mr. Luter and the company became targets of environmental groups and other critics. Animal-rights activists blasted it for confining female pigs to narrow pens known as gestation stalls. In 1997, a federal judge fined Smithfield $12.6 million for violating the federal Clean Water Act by discharging hog-waste pollutants into a Chesapeake Bay tributary.

Mr. Luter often responded undiplomatically. “The animal-rights people want to impose a vegetarian society on the U.S.,” he told The Wall Street Journal in 2001. “Most vegetarians I know are neurotic.”

Mr. Luter now regrets many of those comments over the years. “I did a miserable job” of public relations, he said.

Smithfield’s stock price soared under his leadership. But he stepped down as CEO in 2006 because he was tired of dealing with government regulators, he said. “It wasn’t any fun anymore.”

He was succeeded by Larry Pope, his longtime lieutenant, but remained chairman. Mr. Pope, 58, led a deeper Smithfield push into branded packaged meats in the U.S. and expanded Smithfield’s pork exports to China.

Mr. Luter’s joint-venture proposal to Mr. Wan, made when he was still CEO, involved building a plant together in the U.S. dedicated to producing pork for export to China.

The idea didn’t pan out immediately, but in 2009, Shuanghui engaged advisers to look at Smithfield’s financials with the possibility of a joint venture in mind, according to a person familiar with the matter.

Then this past February, Shuanghui again set its sights on Smithfield, and by mid-April, it had sent the company a merger agreement, triggering a full sprint toward last week’s deal, the person said.

Mr. Luter said he thinks Shuanghui may have accelerated its bid because Continental Grain Co., one of Smithfield’s biggest shareholders, had begun agitating publicly in March for Smithfield to split into three companies. The plan would have separated the company’s hog farms and pork-processing.

Shuanghui said last week that it was “especially attracted to” Smithfield’s vertically integrated model, which Smithfield has argued helps ensure food safety, a huge problem in China.

Mr. Luter said the sale of Smithfield would be bittersweet. Though the company hasn’t been controlled by his family for a long time, he said, Luter family members have been involved in its operations for most of the past 77 years.

Mr. Luter’s son, Joseph W. Luter IV, is an executive vice president overseeing Smithfield’s domestic and international sales and marketing.

“There’s some seller’s remorse,” the elder Mr. Luter said, “but I have a responsibility that’s beyond personal feelings. And I think that Smithfield Foods is worth more to an international company that has international visions than it would be standing alone.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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