Tyson Foods Wins The Bidding War For Hillshire Brands At A Steep Price

Tyson Foods (NYSE:TSN) has won the bidding war for Hillshire Brands (NYSE:HSH) against its biggest competitor in the U.S. fresh chicken meat market, Pilgrim’s Pride (NASDAQ:PPC). The company offered to buy the maker of Jimmy Dean breakfast sausages for $63 per share in cash, beating Pilgrim’s Pride’s final offer by $8 per share. ^[1]

Hillshire Brands’ announcement to acquire Pinnacle Foods (NYSE:PF) earlier last month triggered a series of unsolicited bids by two of the world’s largest meat processing companies to acquire it. The process finally ended last weekend with a rapid-fire auction organized by Hillshire Brands’ brokers, Centerview Partners and Goldman Sachs. We believe that in the heat of the bidding war, Tyson Foods has significantly overpriced Hillshire Brands and could find it difficult to justify the valuation in the long run.

Formerly known as Sara Lee Corporation, Hillshire Brands began trading under the “HSH” symbol on June 29, 2012, following the spin-off of its international coffee and tea business. It sells a variety of packaged meat products including hot dogs, corn dogs, breakfast sausages, dinner sausages and deli meats, as well as a variety of frozen baked products. These products are sold through the retail channel to supermarkets, warehouse clubs and national chains in North America. The company also sells a variety of meat and bakery products to foodservice customers in North America.

We currently have a $41 price estimate for Hillshire Brands, which values it at around 11.5x our CY2014 adjusted EBITDA estimate for the company.

See Our Complete Analysis For Hillshire Brands

What kicked off the bidding war between Tyson Foods and Pilgrim’s Pride was a key announcement made by Hillshire Brands on May 12. The company announced plans to acquire Pinnacle Foods, the maker of Bird’s Eye frozen vegetables and Vlasic pickles, for $6.6 billion, including debt. The move was broadly criticized by investors and analysts alike but Hillshire Brands defended itself by pointing out the advantages of a broader product portfolio and reduced exposure to volatility in commodity meat prices. However, the biggest drawback of the deal was its potential impact on the company’s debt load, which would have increased significantly to around 5x the adjusted EBITDA of the combined company. We discuss the key pros and cons of Hillshire Brands’ Pinnacle deal in detail in a separate note. (See: The Pros and Cons Of Hillshire Brands’ Pinnacle Deal)

Just a couple of weeks after the announcement of Hillshire Brands’ Pinnacle deal, Pilgrim’s Pride, the world’s second largest chicken producer, riding on the recent surge in meat commodity prices offered to buy Hillshire Brands for $45 per diluted share in cash.

This year has been extremely good for meat processing companies so far because of higher pork, beef, and chicken prices in the U.S. Beef prices are up because of the severe drought in the U.S. in 2012 that shrunk the nation’s cattle herd to its smallest size in over 60 years. On the other hand, pork prices are rising because of the growing spread of porcine epidemic diarrhea virus or PEDv, which has killed millions of piglets across 28 states since last spring. Rising red meat prices have also sent the demand for chicken, the cheaper meat, to its highest level in three years. ^[2]

Pilgrim’s Pride’s offer made much more sense for Hillshire Brands’ shareholders since it promised them immediate cash returns without any uncertainties involved in the Pinnacle deal. Even from Hillshire Brands’ business perspective, merging with a meat processing company made a lot more sense than adding frozen vegetables and pickles to its portfolio. However, Pilgrim’s Pride was not the only meat processing company looking to the make best use of the recent upswing in commodity prices by gobbling up some higher-margin packaged meat products businesses. Just a couple of days after the company offered to buy Hillshire Brands, Arkansas-based Tyson Foods entered into a bidding war with it by offering to buy the target company for $50 per share in cash.

Tyson Foods is the world’s second largest meat processing company only behind Brazilian JBS S.A., which owns a majority (75%) stake in Pilgrim’s Pride. With the backing of JBS S.A., Pilgrim’s Pride outbid Tyson Foods earlier this month as it offered to buy Hillshire Brands for $55 per share in cash. However, Tyson Foods eventually won the bidding war with a $63 per share in cash offer for the maker of Ball Park hot dogs.

Tyson Foods’ winning offer values Hillshire Brands’ equity at ~$8 billion, a 70% premium to its closing price on May 9, which was the last traded price just before Hillshire Brands announced its plans to acquire Pinnacle Foods on May 12. Apart from this, Tyson Foods will also take ownership of Hillshire Brands’ $0.55 billion outstanding long-term debt, net of cash and cash equivalents. The deal is contingent on Hillshire Brands terminating its proposed merger with Pinnacle Foods. However, unlike Pilgrim’s Pride, Tyson Foods has not offered to pay Hillshire Brands the $0.16 billion termination fee it would be liable to pay if it cancels the plan to acquire Pinnacle Foods. Overall, Tyson Foods has offered to buy Hillshire Brands at an enterprise value of $8.0 billion, which is $0.85 billion higher than Pilgrim’s Pride’s final offer.

We believe that in the heat of the bidding war, Tyson Foods has overpriced Hillshire Brands. Even if the company is able to realize anticipated cost synergies from the deal it could still find it difficult to justify the steep valuation in the long run. In a three-year period following the deal, Tyson Foods expects to realize annual cost savings of around $300 million from the Hillshire Brands’ acquisition. We can visualize the impact of this on Hillshire Brands’ valuation by adjusting our current forecast for the company’s Retail EBITDA Margin driver in our model to reach around 19% in the long run.

All else remaining constant, this would increase Hillshire Brands’ price estimate to around $57.5 per share, which is more than $5 per share below what Tyson Foods is paying for the company. Therefore, according to our estimates, Tyson Foods would also have to grow Hillshire Brands’ sales revenue at an average annual rate of at least 4.5% apart from realizing cost savings in order to justify the price it plans to pay for the company. Just to give some perspective, Hillshire Brands’ average annual sales revenue growth rate has been just around 0.7% for the past 3 years.

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1. Tyson Foods Submits Unilaterally Binding Offer To Acquire Hillshire Brands For $8.55 Billion In Cash, tyson.com [↩]
2. Profit Tastes Like Chicken in Hunt for Cheaper U.S. Meat, bloomberg.com [↩]