Will Consolidation in the Food Industry Continue?

Pinnacle Foods was left out in the cold after Tyson bought Hillshire, but there could be other suitors.

Jun 24, 2014 at 10:08AM

The meat food industry is in consolidation mode as companies look to extend their footprints and menus. Pinnacle Foods (NYSE:PF), a maker of brand-name food products, suffered a blow earlier this month after Hillshire Brands abandoned its takeover offer for the company. However, it could still be a takeover candidate. Question is, who could be the potential bidder?

Changing scenario
There was a scramble to buy Hillshire earlier this month. Tyson Foods boosted its price for Hillshire after top competitor Pilgrim's Pride (NASDAQ:PPC) entered the picture. Pilgrim's ultimately withdrew from the buyout batter as the purchase price rose. The buyout of Hillshire required that Hillshire scrap its planned acquisition of Pinnacle Foods, leaving Pinnacle to potentially be acquired by another player. 

There appears to be a real battle within the industry to enlarge footprints and food menus in hopes of attracting more consumers. The increasing appetite for protein is part of what is forcing these companies to engage in moves to buy meat companies.

Potential bidder
Pilgrim's could emerge as a potential bidder for Pinnacle Foods, ultimately offering the same price that Hillshire did of around $4.2 billion. The chance of Pinnacle Foods agreeing to a lower price than the Hillshire price is unlikely.

Pilgrim's president and CEO William Lovette has told reporters that it will continue to look for attractive options for buying companies that offer value to its shareholders. The company generated operating cash flow of $1.05 billion and levered free cash flow of $677 million over the trailing-12 month period. Its most recent quarter indicated total cash of $551.98 million, or cash per share of $2.13, which covers 8% of its market cap.

Other potential bidders
In looking at the market cap, other potential bidders for Pinnacle Foods could be Hormel Foods (NYSE:HRL) and ConAgra Foods. Hormel and ConAgra both have a market cap of about $13 billion.

Hormel Foods had cash per share of $499 million, with debt of $250 million, at the end of the most recent quarter. ConAgra had cash of $244 with total debt of $9.49 billion. Of these two companies, Hormel Foods looks to be the most likely bidder for Pinnacle Foods.

What Pinnacle can bring in
The major shareholder of Pinnacle is Blackstone, which has a 51% stake in the company. Therefore, for any deal to come through it is necessary that the bidders satisfy Blackstone in all respects, including the post-merger scenario.

Pinnacle generated net sales of $2.46 billion in fiscal year 2013. Of this, North America retail posted revenue of $2.1 billion, which was up 1% year over year.

Pinnacle's gross margin improved by 1.9 percentage points to 27% from 25.1%, indicating improved pricing. Its earnings surged 38.9% to $1.57 a share from $1.13 a share. In the last four quarters, Pinnacle has delivered earnings either in line with or above the Street's expectations.

Additionally, the company is likely to record $163 million, or $1.39 a share, as the breakup fee for the failure of Hillshire Brands to honor its acquisition commitment. Credit Suisse has upgraded Pinnacle Foods shares to an outperform rating from neutral since it commands a takeover premium as new bidders emerge.

Bottom line
The food industry is highly fragmented and in need of consolidation. This includes the meat industry, which is in focus as more consumers turn to high-protein foods. However, as the options in the meat industry are limited, it's likely that major meat companies might turn to frozen foods and vegetable companies to pair with their meat offerings. Pinnacle Foods looks to be a great play in the food industry and one that could attract further buyout interest.

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