WH Group IPO: The pigs will fly

The China private equity investor who made the above observation added that his primary concern with Alibaba is escalating valuations - scenarios in which hedge fund sells to hedge fund and the demand for access is such that the numbers flying around bear little resemblance to the reality on the spreadsheet. And this for a company that, despite its undoubted size and success, carries numerous question marks: corporate governance, regulation, ability to respond to upstart peers and industry fluctuations...

By contrast, Shuanghui - now known as WH Group - is more of a sure thing. Wan Long, the company's founder and chairman, famously explained his business to one Chinese newspaper as follows: "What I do is kill pigs and sell meat." It is a historically profitable business within China too, a market in which the economic fundamentals point to rising per capita consumption of meat.

And yet it is WH Group, not Alibaba that is in the process of rebuilding its IPO. The first iteration, which launched in early April, targeted a $5.3 billion offering, enough to value the entire company at up to $21 billion and make it the second-largest IPO by a food and beverage player globally after Kraft Foods. CDH Investments, Goldman Sachs, Temasek Holdings and New Horizon Capital all planned to sell a portion of their shares.

Come the end of the month and the size of the offering had been slashed by more than half, with none of the aforementioned PE backers set for a partial exit. Soon it wasn't happening at all, the company citing "deteriorating market conditions and recent excessive market volatility."

WH Group is the work of many years and multiple funds for CDH. The private equity firm made its name restructuring Chinese companies - and taking them offshore until regulations made it more difficult - in preparation for IPOs. This clean exit never seemed to happen for what was then Shuanghui, but everything changed with the acquisition of US-based Smithfield Foods for $4.7 billion. Suddenly an IPO was on the table for the world's biggest pork company.

For all the hype about Alibaba, was WH Group undone by the fact that investors struggled to grasp what the company had become? Certainly, there were perception issues.

Questions have already been asked about the number of banks involved in the original offering and the revised prospectus issued last week has whittled them down from 29 to two. Then there were valuation concerns and the application of a typically high China consumer multiple to a company with substantial exposure to upstream US hog farming. Market conditions might also have deteriorated less rapidly with the reassuring presence of a few cornerstone investors, as is now the custom for large Hong Kong IPOs.

Beyond that, investors were perhaps rightfully wary of a business that was still in the process of digesting a major acquisition. Where was the compelling evidence of synergies? With this in mind, a $597 million payout to two senior executives for their role in a highly-leveraged transaction that has yet to bed down does not look good. And from a private equity perspective, no matter how many times WH Group emphasizes the long-term value of uniting Shuanghui and Smithfield, there may always be the perception in some quarters that assets have been glued together to facilitate a listing.

All criticisms, but none of them fatal and so WH Group's return - with a less banked and presumably more humbly priced IPO - is no surprise. And after that, Alibaba.

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• Topics
• Greater China
• Exits
• China
• IPO
• Consumer
• CDH Investments Management