Pinnacle Foods No Longer at the Top of Hillshire's To-Do List

Source: Wish-Bone.

Not surprisingly, Hillshire Brands (NYSE: HSH  ) is withdrawing its $4.3 billion bid to purchase Pinnacle Foods (NYSE: PF  ) . Originally hailed as a perfect blend of meat and vegetables, sandwiches and pickles, the acquisition attempt quickly went off the rails following competing bids from Pilgrim's Pride (NASDAQ: PPC  ) and Tyson Foods (NYSE: TSN  ) to take over packaged-meats maker Hillshire.

The only caveat to either offer was that Hillshire drop its acquisition of Pinnacle, maker of Vlasic pickles, Wish-Bone salad dressing, and a host of other food brands. With Tyson coming out on top with an offer of $63 per share, or $7.7 billion, Hillshire found the price simply too rich to reject. And this morning the owner of Jimmy Dean sausages made it official that it was withdrawing its offer. As a consolation prize, Pinnacle Foods will receive a $163 million termination fee.

Tyson investors, however, must now be concerned that their company is overpaying for the privilege of buying Hillshire. At a time when the economy seems to be going sideways, consumer spending is soft, and protein prices are hitting new records due to drought and disease, Tyson will issue new debt and maybe even new stock to complete the deal.  

Although it's getting kicked to the curb, Pinnacle may still be a tasty morsel for someone, though not likely any of the losing players in the Hillshire bidding war.

Pilgrim's was looking to acquire Hillshire because its parent, Brazilian meat processor JBS, wanted to diversify away from the low-margin business of selling meat to supermarkets and believed Hillshire would give it a portfolio of brand-name products that could boost its bottom line. While Pinnacle has brand-name power of its own, it would be more an example of Peter Lynch "diworsification" -- buying beyond your core competency. But to a company such as ConAgra or Kraft Foods, it might be a more natural fit.

Pinnacle itself has been willing to play the M&A game, having bought the Wish-Bone salad dressings business from Unilever for $580 million last summer. But with grocery store frozen-food sales stalling as consumers search out fresher, more wholesome options, the premium it would have garnered from Hillshire's offer may not be in the offing again.

Fresh produce is the fastest-growing department in grocery stores, according to the market analysts at Nielsen. Counted as a bundle with meat and deli items, produce grew 7% last year to reach $100 billion in sales. Sales of frozen foods, on the other hand, were flat at $50 billion in sales in 2013.

Hillshire Brands rightly urged its investors to back the board of directors' decision against the still-pending buyout offer for Pinnacle Foods. Now that it is a free agent again, and now that its rivals know it is in the market, expect Pinnacle to be on top of someone's shopping list real soon.

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