JBS Offers to Acquire Hillshire Brands for $5.6 Billion

JBS SA, the biggest meat producer, made an unsolicited $5.6 billion bid for Hillshire Brands Co., seeking to expand its sausage lineup and derail the company’s acquisition of Pinnacle Foods Inc.

JBS’s Pilgrim’s Pride Corp. unit offered $45 a share, it said in a statement today. The deal is contingent on Chicago-based Hillshire scrapping its $4.8 billion agreement to acquire Pinnacle. Pilgrim’s said it met with Hillshire in February and that it “has long been our desire to acquire the company.”

Brazil’s JBS, which spent $17 billion on acquisitions in the past decade to overtake Tyson Foods Inc. in the meat industry, is resuming its takeover campaign less than a year after its last major deal. JBS Chief Executive Officer Wesley Batista said last week in an interview with Bloomberg News that his company will keep expanding via more purchases as opportunities arise. In the U.S., JBS bought Smithfield Foods Inc.’s beef-packing business in 2008 and gained control of chicken processor Pilgrim’s the following year.

The “Holy Grail” for JBS “is to have exposure to all three segments of meat: Poultry, beef and pork,” Ken Shea, an analyst for Bloomberg Industries in Skillman, New Jersey, said by phone. “Today’s unsolicited bid, if effected, would give JBS the third leg of a stool -- a big piece of the pork market.”

Hillshire said in a statement that it will review the Pilgrim’s offer and that it believes in the merits of the Pinnacle deal.

Aggressive Savings

Pilgrim’s hadn’t made an offer until now because it was focused on improving its operations and paying down debt, a person familiar with the company’s thinking said. That has now put Pilgrim’s in a position to offer an all-cash deal, said the person, who asked not to be identified because the discussions were private.

Pilgrim’s and JBS were puzzled by Hillshire’s agreement to buy Pinnacle because they believed the deal’s promised cost savings were aggressive -- especially considering Pinnacle’s private-equity owners had already made cuts, according to the person. Hillshire’s board created an opening for Pilgrim’s in the Pinnacle agreement by inviting offers for all of Hillshire, the person said.

“We are coming forward now because the opportunity for your shareholders to obtain the compelling value represented by our proposal will no longer exist if the proposed acquisition of Pinnacle is consummated,” JBS’s Batista and Pilgrim’s CEO Bill Lovette said in a letter to Hillshire, a copy of which was included in today’s statement.

Tyson, Hormel?

Shares of Hillshire, which makes Jimmy Dean sausages and Ball Park hot dogs, rose 22 percent to $45.19 at the close in New York. Pilgrim’s climbed 1.7 percent to $25.52 while Pinnacle dropped 5.4 percent to $31.48. JBS fell 4.2 percent to 7.56 reais in Sao Paulo.

The Pilgrim’s offer represents a 24 percent premium to the 20-day volume-weighted average Hillshire share price, according to data compiled by Bloomberg. If successful, the proposed transaction would close in the third quarter and be financed with a combination of new debt and existing cash, Pilgrim’s said.

Ricky Sandler, the CEO of Eminence Capital LLC, said Hillshire should engage with Pilgrim’s and that today’s proposal is superior to the Pinnacle transaction. Hillshire should begin a sale process to see if there are other bidders and that interest may come from Tyson and Hormel Foods Corp. of the U.S. and China’s WH Group Ltd., he said in an interview today. Sandler last week criticized the Pinnacle deal for being expensive and said his firm, a Hillshire shareholder, would vote against it.

Moody’s Review

A spokeswoman at Pinnacle didn’t immediately return calls and e-mails seeking a comment. Spokesmen for Hormel, Tyson and WH declined to comment on speculation about a bid.

Pinnacle owns brands ranging from Vlasic pickles to Wish-Bone salad dressings, as well as Birds Eye frozen vegetables. The Parsippany, New Jersey-based company agreed to be acquired after a year as a publicly traded company. Blackstone Group LP bought the foodmaker for $2.2 billion about seven years ago and took it public again in March 2013.

Moody’s Investors Service said May 12, the day that the Pinnacle deal was announced, that it’s reviewing Hillshire for a downgrade. Hillshire is currently rated Baa2 by Moody’s, just two levels above junk, and a purchase of Pinnacle could push it below investment grade.

Profit Margins

In acquiring Hillshire, Pilgrim’s would be getting a “pretty good deal,” said Craig Sterling, an analyst at EVA Dimensions in New York. Hillshire has a profit margin of 6.3 percent, compared with 4.2 percent for Pilgrim’s, he said.

JBS’s last large purchase was its acquisition of the Seara food-processing assets in Brazil from Marfrig Global Foods SA for 5.85 billion reais ($2.6 billion), announced in June of last year. The Pilgrim’s-Hillshire deal would be JBS’s biggest transaction since it acquired Brazilian meatpacker Bertin SA in 2009, according to data compiled by Bloomberg.

Lazard Ltd. is Pilgrim’s financial adviser, while Cravath, Swaine & Moore LLP served as legal counsel. Centerview Partners LLC and Goldman Sachs Group Inc. are financial advisers to Hillshire.

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