story by Kim Souza
Editor’s note: Story updated with changes and additions throughout.
Tyson Foods on Monday (June 9) placed an $8.55 billion bid on the table for Hillshire Brands causing bidding competitor Pilgrim’s Pride to fold. The Tyson offer, the biggest meat deal in U.S. history, has not yet been accepted. Pilgrim’s said it will not make a counter offer.
“The Hillshire Brands acquisition would represent a defining moment for Tyson Foods,” Donnie Smith, Tyson’s president and CEO, said in a statement. “Our strategy has been to grow our prepared foods business, and it has been our aspiration to be a leader in retail prepared foods just as we are in chicken. Now we will have those iconic #1 and #2 brands in numerous categories.”
Officials with Tyson Foods and Hillshire Brands acknowledged the $63 per share cash offer Monday which would require Hillshire to walk away from its pending $6.6 billion acquisition of Pinnacle Foods, a deal announced May 12.
Pilgrim’s Pride CEO Bill Lovette said $55 was their top offer.
"As a disciplined acquirer, we determined that it was in the best interests of our shareholders not to increase our proposed price of $55.00 per share in cash," Lovette said in a statement. Pilgrim’s Pride is owned by Sao Paulo, Brazil-based JBS S.A.
Hillshire execs confirmed the offer from Tyson, but said the deal is far from a sure thing.
“The Hillshire Brands board of directors has not approved the Tyson Foods offer, has not changed its recommendation regarding the Pinnacle merger and is not making any recommendation with respect to the Tyson offer,” Hillshire management noted in a release on Monday. “Hillshire Brands does not have the right to terminate the merger agreement with Pinnacle Foods on the basis of the Tyson Foods offer or enter into an agreement with Tyson Foods prior to its termination. There can be no assurance that any transaction will result from the Tyson Foods offer.”
Bidding for Hillshire began in late May when Pilgrim’s Pride offered $5.52 billion for the company. Tyson Foods countered a few days later with a $6.8 billion ($50 per share) offer. Pilgrim’s countered that with a $7.7 billion ($55 per share) offer on June 3.
Tyson would also be asked to pay the $163 million termination fee to Pinnacle if Hillshire accepts the Tyson bid which will stand until the termination of the Hillshire/ Pinnacle deal on Dec. 12, 2014.
Jimmy Dean, Ball Park and Hillshire Farm are a few of the brands owned by Hillshire.
“The combination of Tyson and Hillshire Brands would reposition Tyson as a clear leader in the retail sale of prepared foods, with a complementary portfolio of well-recognized brands, including Tyson, Wright Brand, Jimmy Dean, Ball Park, State Fair and Hillshire Farm,” Tyson Foods noted in the statement. “In particular, the strength of Hillshire Brands’ products in the breakfast category would allow Tyson to capture opportunities in this attractive and fast-growing day part.”
The pro forma company would give Tyson the No. 2 market share ($3.3 billion) in the frozen value-added category, leap frogging ConAgra in retail sales, according to Tyson. Tyson now has the No. 3 spot with $2.4 billion, and Hillshire ranks eighth at $1.3 billion.
The prepared foods segment is now 9% of Tyson Foods’ $35.4 billion in annual sales. If the deal happens, the combined companies would annual revenue of around $39.4 billion, with 18% of that coming from prepared food sales.
Alexia Howard, a senior research analyst at Sanford Bernstein, has said the deal at $50 made sense for Tyson because its gives them more brands at the end of the of supply chain. Those “value added” products deliver higher margins than food service and commodity meat sales at Tyson Foods.
Analysts were a bit more concerned with the $63 offering. They quizzed Tyson officials as to why they would offer a hefty price for the maker of Jimmy Dean sausages.
Smith said Tyson scouted Hillshire for “a long time.” Tyson Foods said the deal could boost earnings within the first fiscal year after the deal is completed. Company officials also predict more than $300 million in synergies – savings through reducing or eliminating duplicative tasks, operations and personnel – through purchasing, supply chain and marketing efforts.
Shareholders were uncertain with this latest Tyson bid and began to sell off shares in the morning session with the price tumbling 4.66% to $38.26. In late afternoon trading, the share price fell more than 6.5% and was trading around $37.45. The share price closed Friday at $40.12. During the past 52 weeks, the share price has ranged from a $44.24 high to a $24.74 low.
Contributing analysts on CNBC agreed the 16.7 times earnings valuation for Hillshire in the Tyson deal puts the Springdale meat company on the edge of comfort with retaining its investment grade credit rating. Tyson justified the 16.7 times earnings valuation and said it will decline to 10.5 times when the $300 million in operational synergies are realized over the next three years.
BB&T Analyst Brett Hundley downgraded Tyson Foods from a “buy” to a “hold” citing the bidding between it and Pilgrim's Foods. Hundley noted to investors on Friday that the bids were getting too rich to make the numbers work.
"Bidding wars can sometimes leave casualties. The situation with Hillshire is starting to approach this level," he noted to investors.
Tyson Foods said it is not going to gamble away its investment grade credit rating, but it is prepared to issue debt and equity as needed. The transaction would be funded by cash on hand and a bridge loan from Morgan Stanley Senior Funding Inc., and JP Morgan Securities. Tyson anticipates the substantial cash flow from the combined companies will enable it to rapidly pay down debt.