Hillshire’s Rushed Deadline Yields Meaty Offer From Tyson

The takeover battle for Hillshire Brands Co., the biggest maker of breakfast sausage and hotdogs in the U.S., came down to a game of chicken.

After two weeks of escalating offers from Tyson Foods Inc. and Pilgrim’s Pride Corp., Hillshire last week told its two suitors to make their best bids by Sunday, according to people familiar with the matter. If they were close to each other, they would have to bid again.

At the 4 p.m. deadline on Sunday, Springfield, Arkansas-based Tyson decided to go big and make sure it won, raising its bid 26 percent to $63 a share, or $7.7 billion -- nearly double Hillshire’s value from when the saga began. With little growth in food sales, Tyson was salivating to get one of the few large, brand-name meat producers left to buy, the people said.

“There’s this continuing demand to find the No. 1 or No. 2 brands in a category,” said Dave Stone, managing partner of New England Consulting Group. “A lot of these legacy brands just can’t build, they need to buy it.”

Combining Tyson and Hillshire will create a company with $39.4 billion of annual sales and $1.2 billion of net income, according to data compiled by Bloomberg based on trailing 12-month figures.

Spokesmen for Hillshire, Pilgrim’s Pride and Tyson declined to comment.

Hillshire was unchanged at $62.06 as of 11:41 a.m. in New York today, after rising more than 5 percent yesterday. Tyson is down more than 10 percent since it raised the offer.

Early Target

Hillshire was a possible takeover target even while a part of the former Sara Lee Corp. In 2010, Brazilian meat producer JBS SA, which owns 75 percent of Pilgrim’s Pride, made a run at buying Sara Lee mainly to get the Hillshire business, people familiar with the matter said at the time. The two sides couldn’t agree on a price.

In 2012, Hillshire was spun out of Sara Lee and hired Sean Connolly from Campbell Soup Co. as chief executive officer. The company has since focused on improving lunch-meat quality, creating new hot-dog flavors and winning over more customers with lower-calorie breakfast sandwiches. Serving lower-income consumers and the grill-out crowd with its Ball Park hotdogs, the company also has pushed more into high-end meats by purchasing Aidells gourmet sausage and Golden Island premium beef jerky.

While sales were flat, per-share earnings jumped 17 percent to $1.73 last year, according to data compiled by Bloomberg.

Pinnacle Play

In February, executives of JBS approached Connolly at a meeting in Chicago to talk about a potential deal, said a person familiar with the matter. Connolly said he wasn’t interested in selling, the person said. While Pilgrim’s Pride had expressed interest in Hillshire, Connolly always saw the discussions as vague and never felt he received a specific bid, another person said.

Three months later, on May 12, Connolly announced an agreement to buy Pinnacle Foods Inc., maker of Birds Eye frozen foods and Vlasic pickles, among other brands, for $6.6 billion.

While investors didn’t like the deal, pushing down Hillshire shares 3.2 percent the day it was announced, it sent a signal to JBS and Tyson that they needed to act quickly if they wanted to buy the company.

Two weeks later, Pilgrim’s Pride made an unsolicited offer of $45 a share, or $6.3 billion. Two days later came Tyson with a $50 a share offer that amounted to $6.8 billion. Pilgrim’s then upped the ante to $55 a share.

Hillshire’s board decided to take the contest private and instituted the final bidding competition. It pushed to complete the deal over the weekend, according to two people familiar with the matter.

Ensuring Victory

If the process dragged on, the board was concerned that either suitor could lose interest, undercutting Hillshire’s leverage, they said. Hillshire also knew the valuation was frothy and didn’t want to give the market a chance to react before a deal was signed, another person said.

The board’s process called for each suitor to put in a final bid by 4 p.m. Sunday. If the bids were within $2.50 a share of each other, they would submit another, one of the people said. If the next bid was within $1.50 a share, they would have had a third round.

It wasn’t to be. Tyson and its advisers knew that JBS had a reputation for being aggressive in auctions, so they padded their bid to ensure victory, one of the people said.

While Pilgrim’s had plenty of financing lined up it didn’t think Hillshire was worth much more than $55 per share, and didn’t raise its bid, one of the people said.

Meanwhile, Hillshire said it hasn’t yet changed its agreement to buy Pinnacle Foods or made any recommendation on the Tyson offer. As a condition to enter talks, both Both Pilgrim’s Pride and Tyson had stipulated that Hillshire would agree to drop the Pinnacle deal if something worked out.

Financing Deal

Including net debt, Tyson’s bid is worth $8.55 billion, according to the company. That amounts to its biggest deal since its 2001 acquisition of beef producer IBP Inc., according to data compiled by Bloomberg.

Tyson said it’s prepared to sell debt and equity to finance the deal. It expects to use the combined companies’ cash flow to pay down its borrowings “rapidly” while keeping an investment-grade credit rating. Tyson sees the company adding $300 million in earnings to the combined company through cost savings and other merger benefits.

Hillshire’s Jimmy Dean brand dominates breakfast sausage with 30 percent of the market while its frozen protein breakfasts hold a 54 percent share of that aisle. The brand generates more than $1 billion a year in revenue. It also sells the top-ranked smoked sausage and third-ranked lunch meat, both under the Hillshire brand, while its Ball Park hot dogs is the top brand in the U.S.

Centerview Partners LLC and Goldman Sachs Group Inc. advised Hillshire while Morgan Stanley and JPMorgan Chase & Co. advised Tyson.

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