Hillshire Authorizes Talks With Suitors After Higher Bid

Hillshire Brands Co. authorized takeover talks with Tyson Foods Inc. and Brazil’s JBS SA as the $6.7 billion bidding war for the maker of Jimmy Dean sausages and Ball Park hot dogs escalated.

The contest for Hillshire illustrates the desire of traditional meatpackers to gain consumer brands that offer fatter profit margins than those available from slaughtering livestock.

The Chicago-based company was known as Sara Lee Corp. before spinning off its tea and coffee segment and renaming itself Hillshire Brands in June 2012. It’s since focused on improving lunch-meat quality, creating new hot-dog flavors and winning over more customers with lower-calorie breakfast sandwiches.

Pilgrim’s Pride, the chicken producer 75 percent owned by JBS, raised its offer to $55 a share from $45, Hillshire said in a statement today. That topped a $50 a share bid last week from Tyson, the second-largest U.S. pork producer.

The $6.7 billion bid is the second from Greeley, Colorado-based Pilgrim’s Pride. About two weeks before the first bid from Pilgrim’s, Hillshire had itself made an offer to buy Pinnacle Foods Inc., producer of brands including Vlasic pickles, for $6.6 billion including debt.

Hillshire jumped 9.5 percent to $58.65 at the close in New York, 6.6 percent more than the new bid, while Pilgrim’s fell 2.2 percent and Tyson declined 3 percent.

No Recommendations

Hillshire said today that it’s not making any recommendation regarding either of the competing proposals, and it won’t withdraw or alter its advice for the planned acquisition of Pinnacle Foods. A condition of both Tyson and Pilgrim’s Pride’s earlier offers was that Hillshire scrap an agreement to buy the Birds Eye frozen-foods maker.

“This deal is going to be debt financed, and balance sheet strength will probably be the greatest determinant of who wins this battle,” Ken Shea, an analyst for Bloomberg Industries, said today by phone from Skillman, New Jersey.

That might lend an advantage to JBS.

“Tyson said its corporate credit ranking is important to it, and this self-imposed floor on how deep it will go in the debt means Tyson doesn’t want to jeopardize investment grade rating by going after Hillshire,” Shea said. “JBS’s BB rating is already below investment grade, and they don’t seem to bother about taking on more debt.”

Prepared Foods

For JBS, which slaughters and packages beef and poultry, buying Hillshire would push it further into higher-margin, branded prepared foods. JBS spent about $17 billion on acquisitions in the past decade to overtake Tyson in the meat industry. Chief Executive Officer Wesley Batista said May 23 that his company will keep expanding through acquisitions. Hillshire would be the company’s largest U.S. takeover.

Pilgrim’s Pride said today it expects cost savings from the proposed takeover to exceed $300 million annually, and that the purchase would boost earnings per share immediately.

JBS will fund the transaction primarily through debt. After the deal, JBS’s ratio of debt to earnings before interest, taxes, depreciation and amortization would be at least 4.5 times, according to a Standard & Poor’s report from May 28.

The Brazilian company believes that the cost savings and increased cash flow from Hillshire will easily fund the debt, said a person familiar with the matter. Pilgrim’s stated after its first bid that it would be able to reduce its debt-to-Ebitda ratio to 3.5 times.

International Markets

In the longer term, JBS believes it can grow Hillshire by exploring international markets with some Hillshire brands, the person said.

“We view this news as negative for JBS,” Leonardo Alves, an analyst at Votorantim CTVM Research, said today in an e-mail. “In the first proposal, the market has already expressed concerns regarding the increasing leverage ratios, and fear of a bidding war.”

In a May 27 letter sent to Hillshire, Pilgrim’s disclosed a meeting between the two companies in February.

“It has long been our desire to acquire the company,” Pilgrim’s Chief Executive Officer William Lovette and JBS’s Batista said in the letter.

Sara Lee

In 2011, Batista said he had been in takeover talks with Sara Lee earlier that year. Those talks broke down because Sara Lee’s surging share price had made a transaction too costly, Batista said at the time.

Pilgrim’s was puzzled by the Pinnacle bid because it believed the promised cost savings were aggressive considering the cuts that had already been carried out by the company’s private-equity owners, a person familiar with Pilgrim’s thinking said May 27.

Hillshire’s bid for Pinnacle had disappointed some shareholders including activist investor and Hillshire holder Eminence Capital LLC, which opposed the takeover and supported the proposal from Pilgrim’s.

Hillshire is being advised by Centerview Partners LLC and Goldman Sachs Group Inc.

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