The Good, the Bad, and the Ugly of the Tyson Hillshire Deal

It almost sounds like an actual boxing match: Tyson vs. Pilgrim's Pride in a battle to take over Hillshire Brands. It appears that Tyson has won the match; what does this mean for investors?

Jun 13, 2014 at 8:00AM


Source: Beaumont Enterprise

It almost sounds like an actual boxing match: Tyson (NYSE:TSN) versus Pilgrim's Pride (NASDAQ:PPC) in a battle to take over Hillshire Brands (NYSE:HSH). Much drama and pomp accompanied the frenzied bidding war. Now it appears that Tyson (the food company) has won. But a looming roadblock might crop up to halt the merger from occurring. Will Tyson indeed merge with Hillshire, and if so, what does the deal mean for investors?

The good...
Hillshire has a good portfolio of meat brands such as Jimmy Dean and Ball Park that will fit in well with Tyson's brands. Projections from Bloomberg News estimate that the merged company would generate about $39.4 billion in annual sales and about $1.2 billion in net income. 

Hillshire stock has been exploding higher as both Tyson and Pilgrim's Pride have sparred over Hillshire in a tit-for-tat bidding war. Tyson is now potentially getting a company that will help position Tyson better in the meat market. Tyson is already one of the world's largest processors and marketers of chicken, and adding Hillshire helps expand Tyson's reach.

The bad...
The bad part of the deal is mostly falling on Pilgrim's Pride. Pilgrim's Pride did have an extremely strong performance in its latest quarterly report, demonstrating stellar growth and a strong balance sheet. But while Pilgrim's Pride will still have a good position in the industry, its stock is already feeling the pressure of a combined Tyson-Hillshire company.

Losing the bidding war doesn't help Pilgrim's Pride become stronger or gain more traction in the meat market, but that doesn't exclude the possibility of Pilgrim's Pride picking up another company at a cheaper price. After all, the company is actively looking into other potential merger and acquisition candidates. But the stock is being pressured by the Tyson-Hillshire deal in the short term, which may indicate more challenges ahead in the long term as the new Tyson-Hillshire company ramps up its production.

...and the ugly
The ugly part of this equation is the aforementioned roadblock to the Tyson-Hillshire deal. Before the Tyson-Pilgrim's Pride "matchup," Hillshire was actively involved in acquisition talks with Pinnacle Foods (NYSE:PF), a packaged foods company most well known for its Wish-Bone salad dressings and Birds Eye frozen vegetables. In order to cut a deal with Tyson, Hillshire would have to pay a break-up fee to Pinnacle and get shareholders to approve a measure blocking the Hillshire-Pinnacle merger. 

The breakup would indeed make sense, as Hillshire's product line differs from that of Pinnacle, and market trends are souring on the pre-packaged frozen foods that Pinnacle relies on for business. But the decision is all up to the shareholders, who may turn into "picky eaters" on Hillshire.

The bottom line
If the Tyson-Hillshire merger goes through, it will be a big boon for both companies. Hillshire at this point does not have that much upside as long as it is a publicly traded company because its share price is hovering pretty close to the buyout price of $63 per share. Both Tyson and Hillshire currently offer dividends, so even if the deal doesn't materialize an investor in either company would receive good dividend income and potentially corresponding stock price increases as well. Pilgrim's Pride and Pinnacle will still be good companies, but they would be weakened. In the long run, Pinnacle will have to adapt to market trends.

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Evan Buck has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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