Analysts say Tyson overpaid for Hillshire, investment grade could suffer

Few reviews of the move by Springdale-based Tyson Foods to acquire Hillshire Brands for $8.55 billion are favorable. Several analysts say Tyson overbid at $63 per share for Hillshire Brands at the expense of existing Tyson investors, and that the 70% per-share premium could take years for Tyson to recover.

“We believe Tyson stock will be dead money at best for the next 12 months as it copes with the hangover of paying such a big price including an issuance perhaps of $1.6 billion of equity,” noted Robert Moskow, an analyst with Credit Suisse.

Tyson Foods shares (NYSE: TSN) closed at $36.09 on Wednesday (June 11), up two cents. The share price entered June at $42.56, and have fallen more than $7 in response to the bidding war with Pilgrim’s Pride to buy Hillshire. For the past 52 weeks the share price has ranged from a $44.24 high to a $24.74 low.

Moskow was one of two Wall Street analysts to downgrade Tyson stock following the bidding war for Hillshire. Moskow downgraded Tyson from neutral to underperform. BB&T Capital analyst Brett Hundley downgraded Tyson Foods from a buy to a neutral position on Friday (June 6) citing the bids were getting to rich to make the numbers work.

"Bidding wars can sometimes leave casualties, the situation with Hillshire is starting to approach this level," Hundley noted to investors.

He said a bid over $60 by Tyson Foods would run the risk of ruining its investment grade status.

“At the price of $63 per share, we believe Tyson destroyed $2 billion in value. We believe fair value for Hillshire was $47 per share including the $1.3 billion value of synergies,” Moskow said.

Standard & Poor’s put Tyson Foods on credit watch with negative implications following its winning bid for Hillshire Brands because Tyson will assume more debt to finance the high-priced deal.

Tyson now has investment grade credit, two full levels above junk status, but analysts believe the meat giant could teeter on the edge of more downgrades if commodity price increases crimp margins and cash flow needed for debt repayment.

Officials with Tyson Foods say they are prepared to issue debt and equity to cover the purchase but will not sacrifice the investment grade credit rating. Fitch Rating noted Monday (June 10) that a new equity issue is the most favorable option for the company. Tyson’s ratings will take into consideration the equity used to finance the purchase as well as Fitch’s view regarding the pace of reducing debt and Tyson’s ability to garner its projected $300 million in savings

Tyson filed papers June 9 with the Securities and Exchange Commission outlining an extension of a bridge loan for $8.2 billion with a $1 billion “backstop” agreement to cover any contingencies.

BIG APPETITE
Analysts drilled Tyson executives earlier this week about why the bidding went so high for Hillshire Brands. Tyson management said Hillshire is a once-in-a-lifetime deal that will help moderate the volatility of the core commodity business, accelerate its growth rate, improve the value-added mix while also creating operational synergies – improved margins – over time.

Tyson Foods CEO Donnie Smith said culturally the companies are also a great fit and the deal will pay off for shareholders over the next five years. That timeline was extended from three years to five years after Tyson raised its offer for Hillshire from $50 to $63 per share, which made it the most expensive meat deal in industry history.

Stephens Inc. analyst Farha Aslam told Bloomberg Radio this week that growth among U.S. food companies is hard to achieve because Americans are spending about all they are able on food. She said the food industry is seeing several consolidations because interest rates are low and food companies generate lots of cash.

“Hillshire is a strategic fit for Tyson Foods, the largest acquisition in Tyson’s history and it will take some time for them to digest it all.” Aslam said.

Tyson believes adding HIllshire to its portfolio would create a larger market share in the breakfast category the fastest growing segment in food. Tyson said there is also more room to expand margins on Hillshire’s business –  assumption to which Moskow agreed.

ASSET SALES
Moskow said Hillshire presents opportunities for Tyson to generate cash for debt paydown. For example, Credit Suisse believes Tyson will sell off Hillshire’s bakery division which generates about $500 million in annual sales. However, Moskow said it would still be a drop in the bucket given the overpayment for the Hillshire business.

Tyson Foods could also adjust capital expenditures to reduce spending, namely in China, where they have also slowed expansion.

Tyson also just completed the sale of its 50% interest in Dynamic Fuels to Renewable Energy Group. The renewable fuel plant in Geismar, La., was a costly venture for Tyson and partner Syntroleum since the project came online in 2010.

REG paid Tyson approximately $16.5 million in cash at closing on June 9 and retired approximately $13.5 million of Dynamic Fuels’ indebtedness to Tyson, according to a company release. REG has also agreed to make up to $35 million in future payments to Tyson tied to product volumes at the Geismar biorefinery over a period of up to 11.5 years.