Just over a year after going public, Pinnacle Foods (NYSE:PF) is getting gobbled up by Hillshire Brands (UNKNOWN:HSH.DL) in a $6.6 billion deal including debt that will create a middle-of-the-store heavyweight by adding well-known brands like Vlasic, Hungry-Man, and Birds Eye to favorites including Ball Park, Jimmy Dean, and Sara Lee.
Despite the complementary nature of the two companies -- or as Hillshire's CEO put it, "Meats go with vegetables, sandwiches go with pickles" -- Hillshire is taking on some $2.5 billion worth of Pinnacle debt to complete the deal. Because it's been on an acquisition streak these past few months, it may make this latest effort difficult for Hillshire to integrate.
Ever since the current Hillshire was created in 2012 by the spinoff from the old Sara Lee of D.E. Master Blenders (which itself just announced a deal to combine its coffee business with that of Mondelez International), analysts have been looking for M&A events to serve as a catayst for triggering growth.
According to their joint announcement this morning, Pinnacle serves more than 85% of American households with the No. 1 or No. 2 market position across 10 grocery categories, and the premium Hillshire's paying isn't so steep, either. Under the terms of the agreement, each Pinnacle Foods shareholder will get $18 in cash and a half-share of Hillshire Brands stock for every share they own, giving it an implied value of $36.02 per share, or an 18% premium based on the closing price Friday of Pinnacle's stock. Blackstone Group, which bought Pinnacle for $2.2 billion in 2007 and turned it public last year, still owns 51% of the company and will retain a 16% stake after the merger is complete.
While the purchase price seems reasonable, considering the synergies expected, the $140 million in savings anticipated by the third year, and the "annual EPS accretion in excess of 15%" expected, adding Pinnacle's debt to its balance sheet apparently spooked investors, who sent Hillshire's stock tumbling 6% in midday trading. Hillshire itself only had $840 million at the end of the quarter, which it reported just last week. It says the deal won't affect its dividend, which pays $0.70 per share, yielding 1.9%, but its buyback program will be suspended.
By itself, the deal might not be worrisome, but over the past year -- eight months, really -- Hillshire has been keeping its finger on the buyout trigger, as this marks the third acquisition it's made. Just a few weeks ago, it said it would buy Van's Natural Foods for $165 million, and last September it bought gourmet jerky maker Golden Island for $35 million. Pinnacle itself bought Wish-Bone salad dressing maker from Unilever for $580 million, so the multibillion-dollar price tag on this deal, then, is a big step up.
With third-quarter sales up just 3.4% and full-year revenues only up in the low single digits, it's no wonder Hillshire is trying to juice performance. But acquisitions are never a problem until they're a problem, and investors are right to worry that Hillshire Brands is trying to do too much too soon.