Tyson Foods offers $6.8 billion for Hillshire Brands (Updated)

Tyson Foods announced Thursday (May 29) plans to acquire Hillshire Brands in a deal that would be worth $6.8 billion. Tyson said it is not interested in Pinnacle Foods, which Hillshire Brands recently announced it planned to purchase subject to shareholder approval.

Jimmy Dean, Ball Park and Hillshire Farm are a few of the brands owned by Hillshire.

“We believe that there is a strong strategic, financial and operational rationale for the combination of Tyson and Hillshire,” said Donnie Smith, Tyson Foods CEO. “Our proposal provides Hillshire shareholders with an immediate cash premium for their shares that we believe is both greater and more certain than what can be attained in the near term by the company either on a standalone basis or in combination with any other food processing company.”

Tyson’s proposed price of $50 per share represents a 35% premium to the unaffected closing price per share of the company’s common stock on May 9, 2014, the day prior to the announcement of Hillshire’s proposed agreement to acquire Pinnacle. The offer from Tyson is also more than the $5.52 billion offer Pilgrim’s Pride made just a few days ago on Hillshire Brands.

Smith said during a media call that the Tyson Board mapped out a plan to grow its prepared foods division more than a year ago and the Hillshire offer is a great match with Tyson from a business and culture standpoint.

Chief Financial Officer Dennis Leatherby said the Tyson’s offer of $6.8 billion was made with ample thought. He adds that Tyson has the ability to raise that offer given its strong balance sheet, but gave no indication that Tyson is willing to pay more at this time.

He projects the deal has a 3-to 5-year payback in terms of return on invested capital. He said the deal will reduce the company’s return on investment from 21% into the mid teens for the next three years or more, but beyond that Leatherby expects a return to 21% or higher.

“We believe this is a one-plus-one-equals three growth opportunity,” Leatherby said.

The Springdale-based meat giant said the combination of Tyson and Hillshire would reposition Tyson as a leader in the retail sale of prepared foods, with a complementary portfolio of well-recognized brands and private label products. 

“In particular, we believe that the strength of Hillshire’s products in the breakfast category would allow Tyson to capture opportunities from shifting consumer trends in this attractive and fast-growing daypart where Tyson has little presence today,” Tyson noted in the release.

Smith said the deal will also benefit Tyson shareholders as their are numerous supply chain synergies and greater opportunity to expand retail product categories and sales.
The pro forma company would command sales in excess of $40 billion annually, with projected current year earnings of $4.63 per share. The deal, according to the company, also would give Tyson a greater pork market share and expanded retail sales in its prepared foods segment which are now heavily tied to food service.

There is no financing condition to the proposal. Tyson has secured a loan agreement from Morgan Stanley Senior Funding, which Tyson expects will be joined by JP Morgan Securities LLC in the near future. This proposal has the unanimous support of the Tyson Board of Directors and is subject to the termination of Hillshire’s merger agreement with Pinnacle.

Seeking Alpha analyst David Trainer noted that Pilgrim’s and Tyson have over bid for Hillshire Brands.

“TSN (Tyson) has offered the usual statements about positive synergies resulting from the deal, but unless these synergies can double HSH's profits (not likely) the deal is bad for TSN investors,” Trainer noted.

Trainer also said the deal “ties up a significant amount of capital in a low-performing asset and should add a significant amount of debt that will eat up future cash flows.”

Wall Street investor appear to like the deal anyway. Shares of Tyson Foods (NYSE: TSN) were trading at $43.25 in late afternoon trading, up more than 6% for the day. During the past 52 weeks, Tyson shares have ranged from a high of $44.24 to a low of $24.48.

Shares of Hillshire Brands (NYSE: HSH) were up more than 17% to $52.76 in late afternoon trading. The rise indicates that the investment community anticipates a bidding war for Hillshire.