One of the best-performing stocks in the U.S. markets on Jun. 9 was Hillshire Brands (NYSE: HSH ) . After Tyson Foods (NYSE: TSN ) made an unilateral binding offer that valued the business at $63/share ($7.7 billion), the company's share price rose more than 5% to close at $62.06. In addition to throwing an extra wrench in the gears of the plan of Pilgrim's Pride (NASDAQ: PPC ) to acquire the business, this put into doubt the possibility of Hillshire buying Pinnacle Foods (NYSE: PF ) . Moving forward, what does this mean for shareholders in each business and, more importantly, what does this mean for the Foolish investor?
Hillshire's a popular target!
The first bid for Hillshire came on May 27 when Pilgrim's Pride offered to buy out the company for $45/share, which sent the consumer-goods stock soaring 22% from $37.02 to $45.19. Two days later, however, Tyson Foods stepped in with a proposal of $50/share, again propelling the company's stock higher to close at $52.76. Not to be outbid, Pilgrim's Pride came back fighting on Jun. 3 with an even higher offer of $55/share, which sent the company's stock up to $58.65.
In an effort to see which suitor would provide its shareholders with the most attractive purchase price, Hillshire announced on Jun. 3 that it would hold discussions with Pilgrim's Pride and Tyson Foods separately to see what they might be willing to offer for the business. This ultimately led to the $63 bid by Tyson Foods.
|Date||Closing Price for Hillshire||Activity|
|May 23||$37.02||Pre-Bid Price for Hillshire|
|$45.19||Pilgrim's Pride Offers $45/Share|
|May 29||$52.76||Tyson Offers $50/Share|
|June 3||$58.65||Pilgrim's Pride Bids $55/Share|
Tyson Foods Offers $63/Share and Pilgrim's Pride Drops Bid
However, this does not mean that negotiations have ended. Hillshire itself announced that its board of directors has not yet approved the deal and that a deal with its suitor may not materialize. According to Tyson Foods, the offer is good until Hillshire cancels its acquisition of Pinnacle Foods or until Dec. 12 of this year (whichever arrives first).
Unfortunately for Pilgrim's Pride though, this offer by Tyson Foods marked the end of the road. After careful consideration and after discussing the matter of a purchase with Hillshire's management team, Pilgrim's Pride decided that a price exceeding the $55/share it last offered would be too high. The company made this belief public in a press release dated Jun. 9.
What does this mean for Pinnacle Foods?
Prior to the bidding war for Hillshire, the company had been set to absorb Pinnacle Foods in a transaction valued at $4.3 billion ($18/share in cash and 0.5 shares of Hillshire for every share of Pinnacle Foods). The sticking point that seems to be holding Hillshire back is its claim that it cannot cancel the deal with its target because of a stipulation that a failure to consummate the transaction would require it to pay a breakup fee of $163 million.
|Pinnacle Foods||Pilgrim's Pride||Hillshire||Tyson Foods|
|Forward P/E Ratio||18||13||36||13|
Certainly, this is a net benefit to investors who hold shares of Pinnacle Foods, but with the company's shares trading at 18 times forward earnings, it's not an extremely cheap buy (though it is cheaper than Hillshire at this point). This could make the business an interesting prospect moving forward, but with their shares trading at 13 times earnings, Tyson Foods and Pilgrim's Pride both look like classic value plays.
While the future is unclear, it looks as though a deal between Hillshire and Tyson Foods is highly likely to transpire. In the long run, this will raise sales and profits for the combined company and is expected to create as much as $300 million per year in operating synergies for Tyson Foods.
Pilgrim's Pride has lost the battle, but with Hillshire's price so high, this might be for the better and could signal that a buying opportunity might be at hand. Investors in Pinnacle Foods also seem to have drawn the short stick, but with a small chance that Hillshire might shoot Tyson Foods down still on the table, combined with the payment the company will receive from Hillshire if a deal does not transpire, the company could still be an interesting prospect for the Foolish investor.
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