Food fight is on between Tyson Foods and Pilgrim’s for Hillshire Brands

This bidding for breakfast sausage could get expensive. What began as a $6.5 billion bid by Pilgrim’s Pride for Hillshire Brands, has now seen Pilgrim’s up its bid to $7.7 billion to counter a $6.8 billion counter offer by Springdale-based Tyson Foods.

Tyson Foods’ officials would not comment Tuesday about a next move, but the company, in a better financial position than Pilgrim’s, can afford to push the bidding higher.

In an era of higher competition in the low-margin commodity chicken business it’s no wonder Pilgrim’s Pride and Tyson Foods are each actively pursuing Hillshire Brands. Pilgrim’s upped the ante introducing a higher bid of $7.7 billion on Tuesday (June 3) in a deal that would pay Hillshire shareholders $55 per share, a $5 premium over Tyson Foods $50 cash bid offering on May 29.

Pilgrim's revised proposal is not subject to any financing conditions or contingencies, according to the company release. 

“Pilgrim's is confident the transaction is strategically and financially compelling, and creates considerable value for the shareholders of both Pilgrim's and Hillshire. Pilgrim's anticipates run-rate cost synergies in excess of $300 million annually to come from operational and value-chain efficiencies and, in addition, significant growth opportunities in higher margin branded products, both in North America and internationally,” Pilgrim’s CEO Bill Lovette noted in the release. 

He said Pilgrim's expects the increased cash flow from the combined company and the realization of synergies will allow it to rapidly pay down the initial acquisition debt. 

The winners to date have been Hillshire investors as the stock price has rallied another 9% on Tuesday (June 3) to $58.45, up $4.88 on Pilgrim’s counter offer. Shares of Hillshire Brands are up 65% in the past month from the acquisition offers by Pilgrim’s and Tyson Foods.

The offers were unsolicited by Hillshire Brands who had already planned to acquire Pinnacle Foods, a $4.3 billion deal announced May 12. Pilgrim’s and Tyson have both said their offers do not include Pinnacle Foods. 

Tyson hinted during its calls with media and analysts last week that it is financially able to raise the stakes of the offer if necessary. Wall Street is waiting to see if Tyson management will counter the $55 per share bid laid down by Pilgrim’s today.

Hillshire’s Board of Directors said Tuesday it will enter into formal talks with Pilgrim’s Pride and Tyson Foods.

“Hillshire Brands is party to a merger agreement with Pinnacle Foods pursuant to which Hillshire Brands agreed to acquire Pinnacle Foods for per share consideration of $18 in cash and 0.5 shares of Hillshire Brands common stock,” the company said in a statement.

Hillshire also noted that its Board of Directors is not withdrawing, modifying, withholding or qualifying its recommendation with respect to the Pinnacle merger agreement and the merger, or proposing to do so, and is not making any recommendation with respect to either the Pilgrim’s Pride or Tyson Foods proposals.

“Hillshire Brands does not have the right to terminate the Pinnacle Foods merger agreement on the basis of either of these proposals or enter into an alternative acquisition agreement with either of these parties prior to termination. There can be no assurance that any transaction will result from these proposals,” the company noted.

Officials with Pilgrim’s Pride and Tyson Foods said they would pay the $163 million termination fee payable to Pinnacle Foods if one of their offers is accepted.

Alexia Howard, senior research analyst at Sanford Bernstein, said last week the deal make sense for Tyson because its gives them more brands at the end of the of supply chain. Those “value added” products deliver higher margins than food service and commodity meat sales at Tyson Foods.

“It could be a deal of lifetime for Tyson,” she said.

She said the Tyson offer at 13.4 times earnings was the priciest merger and acquisition offer seen this year in the food sector. That was before Pilgrim’s counter offer on Tuesday.

Howard said the fit with Tyson is solid given its diversified protein businesses. It’s not as good of a fit with Pilgrim’s who does not have a domestic pork business. 

TheStreet's Jim Cramer said he does not recommend Hillshire Brands to sell because he thinks the stock could move higher in the bidding war between Tyson and Pilgrim’s who want to move into higher margin offerings. 

Tyson shares (NYSE: TSN) were trading down more than 3% on the news of the higher Pilgrim’s bid. Tyson shares were trading at $42.07 in the heavy volume in the afternoon session (June 3). Pilgrim’s shares (NASDAQ: PPC) also lost ground trading around $25.34 down more than 2% in the afternoon session.