Can you buy a pork filet in Virginia and sell it in Hong Kong at a markedly higher price seven months later? Yes, if the product was kept frozen, is still appetizing after transport, whole enough to pass inspections, and above all, if there are buyers or inspectors that verify the packaging. These last two categories have turned their backs on the product and decreed the WH Group IPO (initial public offering) a failure on the Hong Kong stock exchange. Registered in the Cayman Islands, WH Group announced its imminent quotation in the ex colony, to then withdraw the IPO because of “deteriorating market conditions.” The highly anticipated IPO never saw the light of day, one of the biggest in history. In reality, the stock price was too high for investors’ valuations. Something went wrong and not at all according to plans laid by the 29 banks that structured the offering, as well as the leveraged buy out that made possible the famous acquisition of the group’s most prized asset: the prestigious Smithfield, founded in 1936 and still the biggest pork producer in the US. WH is a new company that had previously purchased the Chinese company, Shanghui, the leading pork producer in the country with the most livestock. After privatization, WH became an international holding and then bought Smithfield in the most onerous operation of Chinese investment in the US. In fact, the operation’s nationality is ambiguous. Capital came from Goldman Sachs, Temasek (Singapore’s sovereign fund), the Chinese fund, CDH, and other important names among international investors. This is a classic situation in globalized finance, where the movement of capital is so nimble that it doesn’t warrant excessive passport controls. What’s surprising, however—after facts are pieced together—is the presence of these investors, who are obviously experts, on the team that went head-on into this resounding failure in Hong Kong.
Strong warning signs were not lacking, even beyond those that experts picked up on. Before the IPO, WH’s management—in Chinese hands—awarded itself a bonus of $600 million with unexpected and unprecedented generosity. Furthermore, their development plan didn’t appear promising, at least not as specialized as industrial giants would have demanded. Finally, the company’s debts were considered excessive (estimated at $7 billion). The most powerful investors noticed, the cornerstone investors that typically acquire the first blocks of shares under favorable conditions, attracted by lower prices. The sellers benefit because they can brag about the subscription of qualified investors to future clients: a direct sign of confidence in the operation. This time, no cornerstone investors presented themselves, and the consequences were negative. And yet, all the shareholders proceeded with launching the IPO, or they were not able to convince WH’s management to assume a less aggressive attitude on the market. The doubts that always surround these operations surfaced with a vengeance. Maybe it’s impossible to contradict the powerful, people were probably afraid of retaliation, or of losing business opportunities. The same managers could behave in an acquiescent manner in the interest of their own careers. This time, the market was strict and a political evaluation might not be far off the mark. The $600 million pre-IPO bonus objectively antagonizes Xi Jin Ping’s battle against wealth disparities. His attempts to fight inequality, the opacity of profits, and even corruption could not find a more glaring obstacle. Furthermore, Shanghui’s privatization happened in 2006, which is to say during the CPC’s preceding administration, and could easily be lead back to a different phase, where preceding lobbies are now less strong. It’s possible that the administration’s aversion took the form of Chinese SOE’s disinterest—the majority obviously controlled by Beijing—in the Hong Kong IPO.