Source: Hillshire Brands

Things couldn't be better for shareholders of Hillshire Brands (UNKNOWN:HSH.DL). After news broke on June 1, 2014 that Pilgrim's Pride (NASDAQ:PPC) offered to buy the company for $55 per share ($6.75 billion), shares of the buyout candidate soared 9.5% to close at $58.65. The company's winning streak continued on June 4, with shares inching up another 1% before falling back 1% on June 5.

In response to this news and in light of a potentially higher offer coming from Tyson Foods (NYSE:TSN), Hillshire agreed to discuss the matter separately with each party but stressed that its agreement to buy out Pinnacle Foods (NYSE:PF) might stand in the way. Moving forward, what does this situation mean for these companies and how can you, the Foolish investor, best benefit?

Who ever thought meat could be so hot?
On May 27, Pilgrim's Pride announced that it would be willing to buy Hillshire in a deal valued at $45 per share ($5.5 billion). Tyson Foods followed up this announcement by Pilgrim's Pride with a counteroffer on May 29 that placed a price on Hillshire of $50 per share ($6.1 billion).

The newest offer by Pilgrim's Pride, which would be an all-cash transaction for $55, gives Hillshire shareholders a lot to think about. In exchange for the cash, investors will be unloading an asset for a rather high 27 times earnings. Assuming that Hillshire manages to only earn the $1.73 per share that analysts have forecast for this year, the business would be purchased by Pilgrim's Pride for an even higher 32 times earnings.

Date Closing Price for Hillshire Activity

May 23

$37.02 Pre-Bid Price for Hillshire
May 27 $45.19 Pilgrim's Pride offers $45/share
May 29 $52.76 Tyson Foods offers $50/share
June 3 $58.65 Pilgrim's Pride counteroffers $55/share
June 4 $59.24 Mr. Market seems to expect higher bids

Source: Yahoo! Finance

While this would be a costly transaction for Pilgrim's Pride, the benefits might be worth it. In addition to growing sales from $8.4 billion to $12.5 billion, the deal is slated to increase the company's forecast net income from $481.8 million to $694 million. Assuming Pilgrim's Pride's share price does not have more of a negative reaction to the deal, the market cap of the combined businesses would equal $13.3 billion.

However, if Tyson does manage to come back with a higher bid, it could mean big trouble for Pilgrim's Pride. With a market cap of $14.7 billion and revenue of $34.4 billion, getting any larger would pose even more of a threat to its smaller rival. This suggests that while Tyson Foods likely has greater resources to buy up Hillshire, Pilgrim's Pride has a bigger incentive to make sure it acquires the company.

Pinnacle Foods could be a problem
One interesting thing about this merger that doesn't typically show up in most deals is the existence of another party that the target is trying to acquire. On May 12, Hillshire agreed to buy Pinnacle Foods for $18 per share in cash and 0.5 shares of its stock for each share of its takeover candidate.

Source: Pinnacle Foods

At the time immediately prior to the first bid by Pilgrim's Pride for Hillshire, this implied a takeover price of $36.51 ($4.3 billion). As part of its agreement to buy Pinnacle Foods, Hillshire agreed to pay a breakup fee of $163 million should it back away from the purchase.

In its announcement detailing its willingness to communicate with Tyson Foods and Pilgrim's Pride individually, Hillshire's management team stated that it does not have the right to terminate this agreement with Pinnacle Foods. More likely than not, this is true in the sense that a failure to follow through with the agreement would mean that its fee would have to be paid to the company; but the fact that Hillshire is willing to open a dialogue with its suitors suggests that management hopes to use the buyout of Pinnacles Foods as leverage in negotiating its own sale.

Foolish takeaway
Based on the data provided, it seems that a buyout of Hillshire could make sense for either Tyson Foods or Pilgrim's Pride, but the deal brings with it a lot of downside. In addition to being a costly transaction, the ultimate expense of the failed merger between Hillshire and Pinnacle Foods is also lost value for shareholders of whoever acquires Hillshire.

While neither of these points mean a further bid will be ruled out, it seems unlikely that the Foolish investor has much to gain by betting on it. Rather, shareholders might want to consider a stake in Pinnacle Foods, which seems to be mostly discounted at this point and could see its shares pop up in the event that Hillshire's suitors are denied the opportunity to buy the company.