The prospect of selling meat under Hillshire Brands Co.’s labels is putting the maker of Jimmy Dean sausages and Ball Park hot dogs on the menu for producers ranging from Tyson Foods Inc. to Hormel Foods Corp. and JBS SA.
Buyers may be tempted to pursue Hillshire while it trades at a 21 percent discount to estimated fiscal 2013 sales, worse than the average among U.S. food manufacturers, according to data compiled by Bloomberg. Called Sara Lee Corp. before spinning off its tea and coffee unit in June, the $3.2 billion company has the top U.S. market share in hot dogs and sausages.
Purchasing the only independent, publicly traded meat seller with top national brands would give poultry, pork and beef processors the chance to boost margins with labels that also include Hillshire Farm and Gallo Salame. Tyson and Hormel are the most likely suitors, said Sanford C. Bernstein & Co. JBS, which ended takeover talks with Sara Lee in 2011 before the spinoff because it was too expensive, might also express interest, according to JPMorgan Chase & Co.
“Hillshire could be an acquisition target,” Alexia Howard, a New York-based analyst for Bernstein, said in a telephone interview. “It’s high margin. It’s less volatile in terms of profit. The brands bring you more negotiating leverage with retailers.”
Matthew Pakula, a spokesman for Downers Grove, Illinois-based Hillshire, declined to comment on the company’s takeover prospects.
The former Sara Lee renamed itself Hillshire in June after spinning off D.E Master Blenders 1753 NV, a tea and coffee company, to shareholders. Hillshire Chief Executive Officer Sean Connolly is now focused on items such as improving lunch meat quality and packaging, developing new hot dog flavors and winning over more households with its snacks and meals.
The company’s price-sales ratio is relatively low. At 0.79 times projected fiscal 2013 revenue, Hillshire fetches a lower multiple than the 1.01 average among U.S. food manufacturers valued at $1 billion or more, data compiled by Bloomberg show. The stock has fallen 9.3 percent since June 29, the first day of trading following the spinoff, closing at $26.29 yesterday.
Today, Hillshire shares rose 0.6 percent to $26.44.
“From a valuation standpoint, we think it’s attractive,” said Kevin Dreyer, a money manager at Rye, New York-based Gabelli & Co., which oversees about $37 billion including Hillshire shares. Dreyer estimates the company, which he called an “attractive takeover candidate,” could be sold for about $37 or $38 a share.
Ken Goldman, a New York-based analyst at JPMorgan, has a December 2013 price forecast of $33 for the stock, saying in a Nov. 1 report this factors in a 10 percent takeover premium.
Hillshire may be attractive to meat processors, whose businesses include raising and slaughtering animals, given that it offers immediate access to national brands, according to Wells Fargo & Co.’s John Baumgartner.
With rival Oscar Mayer already owned by Kraft Foods Group Inc., Hillshire offers the biggest potential deal for suitors among branded meat sellers. Hillshire holds the top market share in sausage and hot dogs and the second spot for frozen breakfasts and sliced lunch meat, the Wells Fargo analyst wrote in an Oct. 1 report, citing data from Nielsen Co.
“Really it’s just the Hillshire portfolio and Oscar Mayer as kind of the main national brands,” Baumgartner said in a phone interview. Hillshire has “done a really good job over the past five years or so in really putting together the frozen breakfast case and protein breakfast with Jimmy Dean. Pretty good innovation, pretty good marketing campaigns behind it.”
Hormel, based in Austin, Minnesota, and Tyson of Springdale, Arkansas, may be interested in Hillshire and have the financial capability to do a deal, said Bernstein’s Howard.
Hormel has added Mexican cuisine and packaged foods through deals in the past decade. The company has a borrowing capacity of about $1 billion, and deals bigger than that depend on the target’s cash generation and Hormel’s desire to maintain an investment-grade credit rating, CEO Jeffrey M. Ettinger said during an investor presentation on Sept. 6.
Alaina Freeman, a spokesman for Hormel who works at Burson-Marsteller, declined to comment on whether the company has any interest in Hillshire.
Tyson, the largest U.S. meat processor, is trying to expand sales by promoting easy-to-prepare foods and expanding uses for chicken, CEO Donnie Smith told analysts on Aug. 6.
Gary Mickelson, a Tyson spokesman, declined to comment.
Tyson, Hormel and Smithfield Foods Inc., the world’s largest hog processor, are looking to make acquisitions to add packaged-meat items, said Farha Aslam, a New York-based analyst at Stephens Inc. Rising grain prices will cap the number of animals heading to slaughter next year, which means more slaughtering plants aren’t needed, she said. Thus, the three meat processors are looking for growth through consumer meat products, Aslam said.
“All three companies’ balance sheets have healed, and they have the financial flexibility to pursue acquisition opportunities,” Aslam said.
JPMorgan’s Goldman said Sao Paulo-based JBS, the world’s biggest beef producer, is a possible buyer. Gimme Credit LLC’s Vicki Bryan agreed, writing in an e-mail that JBS “could find Hillshire complementary.”
JBS CEO Wesley Batista said in July 2011 that he stopped takeover talks with Hillshire predecessor Sara Lee because the stock was too expensive. At the time, Batista said he was only interested in the meat operations.
Now, JBS is focused on “digesting previous acquisitions and on organic growth,” he said during an interview this week in Sao Paulo. “I haven’t looked, and I am not interested,” Batista said regarding Hillshire.
Hillshire may be too big for Smithfield Foods and Tyson to consider, Tim Ramey, a Lake Oswego, Oregon-based analyst at D.A. Davidson & Co., said in a phone interview. Their market values are $3.1 billion and $6.1 billion, respectively.
At a conference in March, Smithfield Foods Chief Financial Officer Robert Manly said his company wasn’t going to purchase Sara Lee. When asked what Smithfield’s current plans were, Keira Lombardo, a spokeswoman for the Smithfield, Virginia-based company, cited Manly’s comments.
Hillshire’s valuation and higher-margin products will eventually stir interest among acquirers, Gabelli’s Dreyer said. For Tyson and JBS, buying Hillshire would mean picking up a company with an 8.3 percent operating margin last quarter that was more than double their most recently reported figures.
“They’ve got a good business, a great brand and somebody is going to want to own them,” he said.