To buy a Swiss company, ChemChina must pass through Washington

In what would be the largest-ever outbound deal by a Chinese company, state-owned Chinese agricultural company ChemChina is pushing ahead with the $43.8 billion USD purchase of Swiss seeds and pesticides giant Syngenta. The acquisition is just the largest of a series of recent bids (already $68 billion in 2016 alone) by Chinese investors seeking to acquire Western companies.

To come to fruition, the ChemChina-Syngenta deal will need to go through the Committee on Foreign Investment in the United States (CFIUS), an interagency body led by the U.S. Treasury Department with the power to review, investigate, and even unwind foreign investments (in companies or assets) which could negatively impact U.S. national security. While an agricultural company may not seem an obvious candidate for threatening America’s homeland, Syngenta owns major assets in the U.S.—including chemical facilities registered with the U.S. Department of Homeland Security as potential targets for terrorist infiltration. With the growing wave of Chinese overseas acquisitions, CFIUS has not hesitated to flex its regulatory muscle. Just last month, the committee blocked the $3.3 billion sale of Philip’s California-based Lumileds division; while its official reasoning has not been disclosed, CFIUS’s decision likely stemmed from Chinese firms being involved and LEDs (which Lumileds produces) being classified “critical infrastructure” as semiconductors. 

{mosads}One issue CFIUS will pay close attention to is the proximity of Syngenta’s U.S. facilities to military installations, a key factor which has forced alterations to proposed deals in the past. In 2013, CFIUS authorized the China National Offshore Oil Corporation’s purchase of Canada’s Nexen Inc. only after drilling leases in the Gulf of Mexico weretransferred to prevent the Chinese company taking control. Syngenta, cognizant of the proximity between its St. Gabriel manufacturing center near Baton Rouge and a U.S. Air Force base at Belle Chase (both in Louisiana), has started mapping out its facilities in hopes of proving they are not too close to military sites.

Based on past experience with Chinese acquisitions of agribusiness assets, the particulars of ChemChina’s Syngenta purchase seem to predispose it not just to CFIUS review but also to serious Congressional scrutiny. When Shuanghui International (a privately-owned meat processing company based in Luohe, China) moved to take over Smithfield Foods for $4.7 billion in 2013, Smithfield CEO C. Larry Pope found himself fielding questions from highly skeptical members of the Senate Agriculture Committee. At the time, committee members including Sens. Heidi Heitkamp (D-N.D.) and Mike Johanns (R-Neb.) asked Pope to answer to concerns that the sale would undermine U.S. pork production and weaken the company’s adherence to food safety standards. Shuanghui, for its part, was involved in a 2011 scandal where the harmful chemical clenbuterol was found in its pork. Then-Sen. Johanns, who also served as Secretary of Agriculture from 2005-2007, openly expressed his frustration over U.S. companies not enjoying a comparable level of access to China’s tightly-controlled market.

The acquisition of Smithfield was ultimately finalized in September 2013, but the opposition it elicited from within Congress set a precedent for the federal government paying closer attention to food security as a factor in approving acquisitions—especially when the buyers are Chinese. At the time, fifteen of the twenty members of the Senate Agriculture Committee urged Treasury Secretary Jack Lew to include both the Department of Agriculture and the Food & Drug Administration in CFIUS’s review of the deal. As companies like ChemChina acquire substantial stakes in American food suppliers, it would not be surprising to see a broader push to classify the food supply as “critical infrastructure.”

So far as the CFIUS review of the Syngenta purchase is concerned, ChemChina will have its answer within the next three months at the latest. When the parties submit theirvoluntarily filing with CFIUS, they will initiate a 30-day review process that gives the committee time to request more information and offer feedback. While most reviews end there, lingering concerns could prompt 45 days of additional investigation. At that stage, the concerned parties could reach a mitigation agreement with the government (which resolved outstanding issues with the Nexen deal). Alternatively, the CFIUS could recommend President Obama block the deal. With that recommendation made, the White House would have fifteen days to make a decision.

As they embark on this process, both ChemChina and the federal agencies reviewing the deal will be working under the watchful eye of the House Agriculture Committee, whose chairman Michael Conaway (R-Tex.) has promised to closely monitor the proceedings. Given CFIUS’s recent rejection of the Philips sale and growing public anger over the U.S.-China trade imbalance, it would be premature to take U.S. government approval of a deal this large as a given.

Held is a financial consultant currently living in Geneva, Switzerland.