Tyson Foods processes an average of more than 400,000 hogs weekly. Source: Tyson Foods.
With Tyson Foods (TSN) trumping Pilgrim's Pride's (PPC 0.28%) buyout offer for Hillshire Brands (HSH.DL), the odd man out in the mad scramble for consolidation among meat processors and packagers is Pinnacle Foods (NYSE: PF), the owner of a broad portfolio of consumer food staples including Birds Eye vegetables, Wish-Bone salad dressings, and Duncan Hines cake mixes.
Hillshire, known for its Jimmy Dean sausage and Ball Park franks, may have thought "meats go with vegetables, sandwiches go with pickles" when it recently bid $6.6 billion for purveyor of packaged foods Pinnacle. But both Pilgrim's and now Tyson predicate their offers for Hillshire on it abandoning the pursuit of Pinnacle. And that likely is OK with investors, who were none too pleased at the thought of assuming Pinnacle's $2.5 billion in debt.
Tyson's $50 per share bid for Hillshire, which includes the assumption of about $500 million worth of debt, values the transaction at about $6.8 billion; that is significantly above Pilgrim's $45 per share, or $6.4 billion, offer, which also includes Hillshire's debt. Now investors get to see if a counteroffer is made. Hillshire has gone from hunter to hunted and the intensity could lead to a bidding war.
The reason both Tyson and Pilgrim's might be willing to raise the stakes comes from the value of Hillshire's brands. As beef, pork, and poultry prices climb to record levels due to drought and disease, branded products allow for higher profits. Tyson said that if it can carry off the acquisition, its prepared foods segment would double sales from 9% of total revenue to 18%, and quadruple the unit's contribution to operating income margin from 5% to 20%. Overall, the pro forma combination of the two companies would widen operating margin from 4.5% to 4.9%.
Source: Tyson Foods investor presentation, May 29, 2014.
While Tyson has its own portfolio of brands, none but perhaps its eponymous products can match the name recognition of Hillshire Brands' brands. Hillshire's tend to be in the No. 1 or No. 2 position of their respective categories. For example, Jimmy Dean products are tops in breakfast sausage, while Hillshire's Ball Park hot dogs and State Fair corn dogs are also No. 1 in their segments. Its Hillshire Farms-branded lunch meats take the No. 2 spot.
The takeover bid sets up a classic battle between the world's two biggest meat packers. Pilgrim's parent JBS (JBSAY 4.69%) seeks control of Hillshire as it strives to move away from simply selling private-label meat products to supermarkets. Like JBS, Tyson has said acquisitions are part and parcel of its future growth strategies. Because the bids by both companies have offered investors a healthy premium for their shares without being overly generous -- Tyson offers a 35% premium at a trailing 13% adjusted EBITDA -- it suggests there's plenty of room for further counteroffers.
Where Hillshire's shares dropped when it bid for Pinnacle, Tyson Foods' stock shot up 6% as investors realized the complementary nature of bringing Hillshire's brands into its portfolio. How far it's willing to go to bring it in-house remains to be seen.
