Big Chinese Pork Producer Cancels Its IPO

HONG KONG - The WH Group of China, the world's biggest pork producer, decided on Tuesday to cancel its $1.9 billion initial public offering in Hong Kong because of lackluster demand.

Despite the efforts of an unprecedented 29 underwriters, the I.P.O., which had previously sought to raise as much as $5.3 billion, failed to generate enough enthusiasm from investors.

In a stock exchange announcement late on Tuesday in Hong Kong, the company confirmed that the deal had been scrapped, citing 'deteriorating market conditions and recent excessive market volatility.' Hong Kong's benchmark Hang Seng index has dropped 4.5 percent since April 10, when the WH Group began marketing its I.P.O.

'This particular deal tells you everything that's wrong with the Hong Kong I.P.O. process,' said a person briefed on the deal, who was not authorized to speak publicly. 'With the crazy number of banks working on the I.P.O., people were worried to tell the truth to the company and just said what the client wanted to hear.'

Hong Kong is one of the world's biggest markets for new share sales, topping the global ranks in terms of the amount of money raised from 2009 to 2011 as more and more Chinese companies have gone public.

But in recent years, deals have been characterized by the growing armies of banks involved in them - a trend that is intended to help ensure success but that also risks a situation in which individual banks devote less time and resources to marketing an offering. The China Galaxy Securities Company, a midsize state-owned brokerage firm, set the previous record for number of underwriters - 21 - in May 2013.

The cancellation of the WH Group's offering is particularly notable because, as originally presented, it would have been the world's biggest I.P.O. since that of a Brazilian insurer, BB Seguridade Participações, in April 2013

WH, previously known as Shuanghui International, paid $4.7 billion in cash last year for Smithfield Foods, the biggest pork producer in the United States. It was the biggest buyout ever of a United States company by a Chinese one. The I.P.O. of the newly combined businesses originally sought to raise as much as 41.2 billion Hong Kong dollars, or $5.3 billion, when it was announced this month.

But the deal met with a cold reception, and the company announced last Friday that it would reduce the number of shares it planned to sell by more than half but keep the marketed price range the same, at 8 to 11.25 dollars a share. Despite this, investors failed to warm to the deal.

Another factor that hindered WH's success was an outbreak of the porcine epidemic diarrhea virus that started to take hold among pigs in the United States last year. The situation has worsened in recent months, with Chinese regulators imposing temporary restrictions on the importation of live hogs from the United States.

That has driven up hog prices drastically in the United States, creating problems for WH's business model. Despite the lower labor and other costs in China, hog prices in the United States have typically been lower because of more efficient production methods and lower feed costs.

WH has announced plans to use its purchase of Smithfield to export lower-cost United States pork to China, the world's biggest pork consumer, where it can be sold at a premium because of its high quality and because of food safety concerns among Chinese after adulterants and pollutants have been found in everything from eggs to rice to pork in recent years. But rising pork prices in the United States make that a less profitable trade.

Investors were also put off by the company's high level of debt, largely the result of its borrowing to acquire Smithfield.

Moreover, as part of cutting the size of its I.P.O., WH had said that existing shareholders would cancel their plans to sell shares in the offering. But that touched off worries among potential investors that those shareholders would eventually seek to dispose of large stakes, which could have pushed down the price of the stock after it listed.

Those investors include CDH Investments, a big Chinese private equity group; Goldman Sachs; the company's management; the Singapore state investor Temasek Holdings; and New Horizon Capital, a private equity firm co-founded by the son of Wen Jiabao, a former Chinese prime minister.

Among the 29 banks that were involved in the deal, seven had taken the lead as joint sponsors. They were Bank of China International, Morgan Stanley, Standard Chartered, Citic Securities International, Goldman Sachs, UBS and DBS.

This post has been revised to reflect the following correction: Correction: April 29, 2014

An earlier version of this article misspelled the name of a former Chinese prime minister. He is Wen Jiabao, not Jibao.

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