After the company backed out of a bidding process designed to buy up Hillshire Brands (UNKNOWN:HSH.DL), shares of Pilgrim's Pride (NASDAQ:PPC) fell nearly 7% to close at $24.51. Moving forward, investors seem to be wondering if the company can justify its current valuation without Hillshire, but the fact of the matter is that this may have created an amazing opportunity for the business. With Hillshire out of the picture and the possibility that it may have to back out of its agreement to buy Pinnacle Foods (NYSE:PF), Pilgrim's Pride may have the perfect moment to jump into the fray and pick up Hillshire's original target.
The Hillshire fallout
On Jun. 9, Pilgrim's Pride announced that it had terminated its latest offer to buy Hillshire in a transaction that had valued it at $55/share ($6.75 billion). This came after another bidder, Tyson Foods (NYSE:TSN), offered $63/share ($7.7 billion), a price that Pilgrim's Pride considered unjustifiable.
If Hillshire agrees to an acquisition by Tyson Foods, it will have to pay a breakup fee of $163 million to Pinnacle Foods, a company that Hillshire had previously planned to purchase for $4.3 billion. However, for Pilgrim's Pride, a company hungry for M&A action, Pinnacle Foods may make for an interesting opportunity.
Attractive diversification opportunities
Information in its most recent annual report shows that Pinnacle Foods offers market participants an opportunity to diversify their holdings across product categories. At the end of its 2013 fiscal year, the company chalked 44.5% of its revenue up to its Birds Eye Frozen segment, which consists of brand names like Aunt Jemima, Hungry-Man, and Lender's. In this set of operations, two of the company's product lines hold the No. 1 spot in market share, while three product lines hold the No. 2 spot.
The company's second-largest segment, Duncan Hines Grocery, is also a major player. In addition to holding the No. 1 spot in market share for three product lines and the No. 2 spot for one product line, this portion of the company brings in roughly 40.8% of sales for Pinnacle Foods. Meanwhile, the remaining 14.7% of the company's sales come from its specialty foods segment, which is made up of snack products, private label, and food-service operations.
|Segment||Percent of Revenue||Revenue|
|Birds Eye Frozen||44.5%||$1.1 billion|
|Duncan Hines Grocery||40.8%||$1 billion|
|Specialty Foods||14.7%||$362 million|
As a company with poultry as its only significant source of revenue, Pilgrim's Pride could benefit from acquiring Pinnacle Foods. In addition to diversifying its operations and satisfying the business's thirst for a deal, Pinnacle Foods would cost less than Hillshire.
Using forward earnings, it's likely that any offer coming from Pilgrim's Pride to top Tyson Foods' proposal for Hillshire would require the company pay at least 37 times Hillshire's EPS. Instead, the company could opt to bid for Pinnacle Foods, which is trading at a more modest 18 times forecast earnings. This multiple is still higher than that of Pilgrim's Pride at 13 times profits but would give the company much of what it wants at a fraction of the cost of Hillshire.
It appears as though Pilgrim's Pride and Pinnacle Foods are being left out in the cold. However, misery loves company and this sense of defeat could spur management to act in an effort to save face. Aside from the psychological factors, though, acquiring Pinnacle Foods could be sensible from a fundamental perspective given the company's product lines and the cost of a deal for shareholders in Pilgrim's Pride.