Earlier this month, Hillshire agreed to buy Pinnacle Foods Inc. (PF), the maker of Birds Eye frozen vegetables, Wish-Bone salad dressing and Duncan Hines cake mix. Its investors didn’t like the deal, and neither did meat and chicken producers Tyson and Pilgrim’s Pride Corp., who consider Hillshire a more valuable target as a meat company. Both jumped in with offers to acquire Hillshire and derail the Pinnacle purchase.
Tyson’s $6.2 billion bid, which trumped Pilgrim’s, already represents one of the richest valuations for a major takeover in the food industry, according to data compiled by Bloomberg. Traders are betting that an even higher offer will emerge for Hillshire and that its plans to buy Pinnacle are probably dead.
The Pinnacle deal “didn’t make much sense to us, but on the plus side, it certainly spurred both of these potential acquirers to come out of the woodwork and make an offer for Hillshire while they can,” Kevin Dreyer, a money manager at Gabelli Funds, said in a phone interview. “Hillshire has only one real choice going forward and that’s to abandon the Pinnacle deal and engage with both of these parties, as well as anybody else that might be interested.”
Gabelli Funds is a unit of Rye, New York-based Gamco Investors Inc., which oversees about $48 billion and owns Hillshire and Tyson stock.
Mike Cummins, a spokesman for Chicago-based Hillshire, declined to comment beyond its press release yesterday, which said the board will review Tyson’s proposal.
“We believe our offer represents the full and fair value for Hillshire and that the combined companies will generate significant synergies,” Gary Mickelson, a spokesman for Tyson, said in an e-mailed statement yesterday.
Pilgrim’s (PPC) said in a press release yesterday that it’s considering its options with respect to Hillshire. A representative for the company declined to comment further.
Shareholders including Eminence Capital LLC balked at Hillshire’s plan to spend its cash on Pinnacle’s slower-growth brands, and Hillshire shares fell May 12 after the $6.6 billion deal was announced. They were also disappointed because the transaction could diminish the potential for Hillshire, the maker of Jimmy Dean sausages and Ball Park hot dogs, to get bought given that it would no longer be largely a meat company.
Hillshire is offering a high price for a “mediocre set of assets,” Eminence Chief Executive Officer Ricky Sandler said in an interview last week. “The deal makes them less attractive to an acquirer.”
Pilgrim’s, the chicken processor majority-owned by Brazilian meat producer JBS SA, then swooped in with a surprise $45-a-share bid for Hillshire two weeks later. Hillshire shares rallied 22 percent.
Tyson, another company long considered a logical suitor for Hillshire, followed with a competing offer of $50 a share yesterday, kicking off a possible bidding war.
“They’re trying to get a hold of Hillshire before it embarks on the process of bulking up” with non-meat products, Louis Meyer, a special situations analyst at Oscar Gruss & Son Inc., said in a phone interview from New York. “They want to stop this transaction now so that they can get Hillshire without having to do more slicing and dicing later.”
A takeover of Hillshire would give Tyson or Pilgrim’s high-margin consumer goods that would help them diversify from the cyclical, lower-margin business of selling commodities, according to Ken Shea, an analyst for Bloomberg Industries in Skillman, New Jersey.
“They look at Hillshire as having complementary assets to what they do,” Shea said in a phone interview. “They don’t want to get in the business of frozen vegetables and maple syrup.”
The timing of the bids isn’t surprising, given that next month marks the two-year anniversary of the breakup that created Hillshire, according to Shea. In June 2012, Sara Lee Corp. split off its coffee and tea division to become a meat-focused company and renamed itself Hillshire.
It would have been tricky for a suitor to buy Hillshire before that anniversary because of rules imposed by the U.S. Internal Revenue Service regarding spinoffs, Ken Goldman, a New York-based analyst at JPMorgan Chase & Co., wrote in a report this month. The potential tax implications of a takeover “largely dissipate” after June, he wrote.
Tyson has offered to pay 14.5 times Hillshire’s trailing 12-month earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show. Meanwhile, Hillshire offered 17 times Ebitda for Pinnacle, which would have been the most expensive food takeover larger than $5 billion since the financial crisis, the data show. That means if the Pinnacle deal is scrapped and Hillshire sells to Tyson, it will take the spot as the priciest deal.
“We’ve now entered the rich territory,” said Meyer of Oscar Gruss, who sees Tyson potentially increasing its offer by $2 to $3 a share to persuade Hillshire and ensure a deal gets done. Hillshire’s stock traded $2.94 above the bid today at 10:33 a.m. New York time, signaling investors expect the company to get sold at a higher price.
Pilgrim’s is the more constrained suitor, Meyer said, particularly after its parent company’s bondholders reacted negatively to the possible deal.
While WH Group Ltd. is also probably interested in Hillshire, the company -- known as Shuanghui International Holdings Ltd. before it changed its name in January -- has its hands full after spending $4.7 billion on pork processor Smithfield Foods Inc. last year, said Shea of Bloomberg Industries. Hillshire would be a good fit for Hormel Foods Corp. (HRL) too, though the chili maker doesn’t have the financial wherewithal for a takeover that large, he said.
A representative for WH Group declined to comment. Rick Williamson, a spokesman for Austin, Minnesota-based Hormel, said the company doesn’t comment on acquisitions.
Tyson’s $50-a-share offer is a good starting point and far better than Hillshire acquiring Pinnacle and remaining a stand-alone entity, said Dreyer of Gabelli. Analysts predict that if Hillshire doesn’t get acquired, its shares will trade for just $44 in a year, 17 percent lower than yesterday’s price, according to the average of estimates compiled by Bloomberg.
“This is a great situation because you have two very interested, motivated parties, and they have room to go higher still,” he said. “Let the best buyer win.”
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