Hillshire Better as Target Than Pinnacle Buyer: Real M&A

Hillshire Brands Co. investors would rather see their company hunted by a meat producer than buying up vegetable brands.

The shares rallied 22 percent yesterday after Pilgrim’s Pride Corp., the chicken processor majority-owned by JBS SA, announced a more than $6 billion takeover bid for Hillshire, including net debt. That compares with a 3.2 percent drop on May 12, the day Hillshire offered to buy Pinnacle Foods Inc., which makes Birds Eye frozen vegetables. Combining with a meat producer means more cost-cutting and supply chain benefits than buying Pinnacle Foods, according to JPMorgan Chase & Co.

Activist investor and Hillshire shareholder Eminence Capital LLC said the company should engage with Pilgrim’s and explore whether there are any other interested suitors. Tyson Foods Inc. and WH Group Ltd. top the list of potential counterbidders, according to Kenneth Shea at Bloomberg Industries, who also sees Hillshire fitting some of the qualities Warren Buffett looks for in deals. Pilgrim’s could raise its $45-a-share offer to as much as $50, though a bidding war could push the price higher, said Albert Fried & Co.

“It behooves them to basically spend less time arguing about why the Pinnacle Foods transaction is a superior one, because they’re likely to lose that battle,” said Sachin Shah, a special situations and merger arbitrage strategist at Albert Fried. Hillshire is better off arguing “that they’re worth more than $45” in a sale.

Evaluating Pilgrim’s

The $5.5 billion company said in a statement yesterday that its board will “thoroughly review” the proposal from Pilgrim’s and that it still believes in the strategic merits of the Pinnacle Foods deal. Matt Pakula of Chicago-based Hillshire declined to comment further. A representative for Pilgrim’s also declined to comment.

The Pilgrim’s all-cash preliminary proposal is contingent on Hillshire scrapping its purchase of Pinnacle Foods, which would force the meat producer to pay a $163 million breakup fee. Pilgrim’s, a $6.6 billion company, met with Hillshire in February and said yesterday that it “has long been our desire to acquire the company.”

Stock Drop

The Pinnacle Foods acquisition announced earlier this month was spurned by some investors and analysts who saw it as adding slower-growth brands at the cost of boosting Hillshire’s leverage ratio to the high end for U.S. food companies. Hillshire fell as much as 7.4 percent that day.

“The market clearly had its reservations” about the Pinnacle Foods acquisition, Ken Goldman, a New York-based analyst at JPMorgan, wrote in a report yesterday. A combination of Hillshire and Pilgrim’s “makes a lot more sense than marrying a meat company with one that has a focus on frozen vegetables,” he wrote.

Hillshire stock fell 0.4 percent to $44.99. Shares of Pilgrim’s declined 0.6 percent to $25.38, while Pinnacle Foods rose 0.3 percent $31.58.

Eminence Capital, the hedge fund that pushed Jos. A. Bank Clothiers Inc. to sell itself to Men’s Wearhouse Inc. and shelve a deal for Eddie Bauer, is planning to vote against the Pinnacle Foods purchase. Yesterday, Chief Executive Officer Ricky Sandler said that the Pilgrim’s bid was superior and that Hillshire should open up a process to see if anyone else is willing to pay more. Eminence Capital held about 1.1 percent of Hillshire stock at the end of March.

Other investors will likely feel the same, said Shea, a food analyst at Bloomberg Industries.

The Pinnacle Foods deal “left shareholders less than thrilled,” he said in a phone interview. “Now with an emerging bid, you see the stock rallying nicely, even above the bid of $45. That suggests to me the market is saying this company is now in play.”

Higher Valuation

The Pilgrim’s takeover bid values Hillshire at about 13 times its earnings before interest, taxes, depreciation and amortization in the last 12 months, according to data compiled by Bloomberg. That compares with a median multiple of about 11 for food deals of more than $1 billion in the last five years, the data show.

The price, while attractive, probably isn’t high enough to prevent other buyers from emerging, Shea said. One possible bidder is WH Group, which changed its name from Shuanghui International Holdings Ltd. in January after acquiring U.S. hog and pork producer Smithfield Foods Inc.

Tyson Interest?

Another is Tyson, Shea said. Tyson Chief Financial Officer Dennis Leatherby said on the company’s earnings call this month that the merger and acquisition environment is “very attractive” and the $14 billion company has the ability to go after both “small bolt-on acquisitions or larger more strategic acquisitions.”

In February, two people familiar with the matter said Tyson made a bid for Michael Foods, the processing and distribution business controlled by Goldman Sachs Group Inc.’s private-equity arm. Post Holdings Inc. agreed to acquire Michael Foods, the maker of Simply Potatoes, in April.

Hillshire may have some appeal for Buffett’s Berkshire Hathaway Inc., which has shown an affinity for brand names and food companies with its 2013 acquisition of H.J. Heinz Co., Shea said. Buffett usually prefers to strike friendly deals though, and Hillshire may not fit the profile of a willing seller, the analyst said.

Hormel Foods Corp. would probably be able to extract even more revenue and cost synergies than Pilgrim’s, Alexia Howard, a New York-based analyst at Sanford C. Bernstein & Co., wrote in a report yesterday. JPMorgan’s Goldman said closely held Cargill Inc. is also a possibility, noting that the company’s CFO Marcel Smits was the last leader of Sara Lee Corp. before it split into Hillshire and its coffee business in June 2012.

Representatives for Austin, Minnesota-based Hormel, Springdale, Arkansas-based Tyson and WH Group declined to comment on speculation about a bid. Buffett didn’t respond to a request for comment sent to an assistant. Neither did Cargill.

Price Estimates

Given that the Pilgrim’s approach earlier this year didn’t turn into a deal then, Hillshire management may be resistant to selling, Liang Feng, an analyst at Morningstar Inc., wrote in a report yesterday.

Even so, it may be hard for Hillshire to argue against a sale at a stock price the company hasn’t achieved since the breakup of Sara Lee. As of last week, analysts projected Hillshire’s stock would rise to $40.40 in the next 12 months.

Based on the valuations of similar food company transactions, Pilgrim’s could pay $48 to $50 for Hillshire, said Shah of Albert Fried. A bidding war may yield even more.

It’s likely “that $45 is a superior offer relative to the Pinnacle Foods transaction, but that doesn’t mean that the superior offer is the full value that Hillshire shareholders should be getting,” Shah said. “They should obviously try to get more.”

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