Tyson Wins but Gets Bloodied in Hillshire Battle

Source: Tyson Foods.

According to reports over the weekend, Tyson Foods (NYSE: TSN  ) has won the bidding war for Hillshire Brands (NYSE: HSH  ) , offering $63 per share, or $7.7 billion, to best Pilgrim's Pride's (NASDAQ: PPC  )  bid of $55 per share, or $6.8 billion. While the protein provider appears to be the last man standing, as final bids from both sides were due yesterday afternoon, it may have won the battle but ultimately lost the war if it overpaid for the honor.

Tyson is paying a 70% premium for Hillshire stock that was trading at $36 a share when the bidding war began. It previously said that if it won the acquisition dust-up, its prepared foods segment would double sales from 9% of total revenue to 18%, and quadruple its 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%, as Hillshire's branded portfolio of products brings with it higher profits.

That was the allure for Pilgrim's Pride, which is 75% owned by Brazilian meat processor JBS and was looking to push further into branded meat products, which carry greater profit potential than selling private-label meats to supermarkets. JBS tried previously to buy Hillshire Brands when it was part of Sara Lee, but the consumer goods company instead chose to spin off its coffee business and folded the remaining assets into the packaged meats maker.

If Tyson has come out on top, one small hurdle would remain before it could consummate the deal: Hillshire's outstanding $6.6 billion offer to acquire Pinnacle Foods (NYSE: PF  ) .

Prior to Pilgrim's Pride and Tyson duking it out for Hillshire, the packaged meats company had sought to grab hold of the maker of Vlasic pickles and Birds Eye vegetables. It was a bit of a surprise for the protein rivals because Pilgrim had approached Hillshire earlier in the year with a buyout offer; but Hillshire can't unilaterally just walk away from its bid, so investors need to first reject the Pinnacle takeover before they can accept Tyson's (or Pilgrim's) bid. In either case, both companies have said they would pay the $163 million breakup fee that will be due Pinnacle.

It shouldn't be too difficult to get shareholders to reject the Pinnacle deal, as they were none too excited at Hillshire taking on the consumer goods company's $2.5 billion worth of debt to begin with. And the rich premium for their shares Tyson is willing to pay is likely inducement enough to get them onboard.

Tyson's shareholders now must consider whether the offer their company made is worth the price it would pay. Analysts thought the original $50-a-share bid Tyson made to trump Pilgrim's Pride was a bit pricey; now it's upped that amount by more than 25%, and it will need to figure out ways to squeeze savings from the merger. Consumer spending is soft, the economy is weak, protein prices -- particularly pork and beef -- are at record high levels due to disease and drought, and Tyson will have to issue new debt and possibly dilute current owners with new stock offerings just to get the deal done.

While I suspected Tyson would only up the ante a little following Pilgrim's Pride's raised offer last week, it's clear the meat processor saw this deal as a faster way to bring itself into branded goods. It may have knocked out its rival, but Tyson Food investors may be the ones left bloodied.

Another knock-down, drag-out battle
In the war for viewers, you know cable's eventually going to lose out. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2987814, ~/Articles/ArticleHandler.aspx, 9/17/2014 5:31:52 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement