Tyson Digs Deep For Coveted Hillshire Deal

Editor’s Note: This story went to press Aug. 28, just a few hours before the announcement by Tyson Foods that its acquisition of Hillshire Brands Co. was complete. For updated details on the merger, including specifics on the new leadership team as one company, click here.

 

To pull off the biggest deal in the history of the U.S. meat industry, Tyson Foods Inc. needed a mountain of money.

Through a package of bonds, loans, stock, tangible equity units and cash, the king of protein had just that — $8.5 billion, enough to acquire Hillshire Brands Co., the nation’s leader in premium packaged meats.

Completion of the merger was expected Aug. 28, just as the Northwest Arkansas Business Journal went to press. Once the ink is dry, the pecking order in the protein market will be clear cut: Tyson and everybody else. The definitive merger agreement, announced publicly July 2, was initially postponed by the Antitrust Division of the U.S. Department of Justice due to concerns over the merger’s effect on the pork-buying market.

On Aug. 27, however, Tyson announced that it and Hillshire had agreed to the justice department’s settlement proposal that Tyson sell off its Midwest sow-purchasing business, Heinold Hog Markets. The divestiture of the asset, a seven-state enterprise that bought 660,000 sows and generated $270 million in revenue last year, will result in a sow-purchasing entity controlled by neither Tyson nor Hillshire.

According to the proposed settlement, the divesture would “eliminate the anticompetitive effects of the acquisition in the market for purchases of sows from U.S. farmers.”

A final judgment on the antitrust issue was approved by the United States District Court for the District of Columbia on Aug. 27, giving Tyson and Hillshire the green light on the merger. Other parties to the suit delaying the Tyson-Hillshire deal were the states of Illinois, Iowa and Missouri, where much of the sow industry is concentrated.

Now that the federal inquiry is over, Tyson can focus on what it coveted — a powerful breakfast brand like Jimmy Dean sausage in the meat case and control of a company with strong profit margins and iconic names like Hillshire Farm and Ball Park in its portfolio.

The Tyson-Hillshire merger, valued at around $40 billion, is so big that protein industry expert Steve Kay, the editor and publisher of Cattle Buyers Weekly, said the scope of the acquisition is unprecedented.

“It’s hard to see that it will be equaled for many years,” said Kay, who has followed the industry for nearly 30 years. “There probably won’t be anything like it in the protein industry in the near future.”

Even its detractors admit that it’s a blockbuster. Patrick Woodall of the Washington, D.C.-based Food and Water Watch, the organization that led the grassroots effort to place the proposed merger under federal review, said: “This is one of the larger food mergers going on this year. It will change the landscape of the meat case across the country.”

 

‘The Best of Its Kind’

In filings with the SEC, Tyson outlined exactly how it raised the $8.5 billion needed for the transaction: $3.25 billion in bonds, $2.5 billion in term loans, $1.5 billion in tangible equity units, $900 million in common stock and $362 million in cash on hand.

In a bidding war with Pilgrim’s Pride, Tyson offered $63 per share compared to the competing offer of $55 per share. Some industry analysts said Tyson, in besting Pilgrim’s Pride by nearly a billion dollars, paid too much. Kay, however, is not one of them.

“How much is too much?” he said. “They’re getting a company that’s the best of its kind in the United States. This is almost a once-in-a-lifetime opportunity.”

To raise the cash needed for the purchase, Tyson engineered a package that includes: $1 billion in five-year bonds, $1.25 billion in 10-year bonds, $500 million in 20-year bonds and $500 million in 30-year bonds; $2.5 billion in loans issued on three-year and five-year terms; 23.8 million shares of common stock at $37.8 per share; 30 million of the company’s 4.75 percent tangible equity units at $50 per unit; and $362 million in cash.

In the lead up to the acquisition, Tyson sold its operations in Mexico and Brazil for $575 million, with the proceeds being used to pay down debt associated with the Hillshire deal, according to Tyson. Outdated and underperforming plants in New York, Iowa and New Mexico were also closed.

What the Tyson executive team will look like post-merger is not known, as Tyson would not say if the leadership team would expand to include executives from Hillshire, specifically president and CEO Sean Connolly and executive vice president and CFO Maria Henry.

According to a Tyson press release, Hillshire will become a wholly owned subsidiary of Tyson and its shares will no longer be traded on the NYSE or the Chicago Stock Exchange.

Tyson has not publicly disclosed its plans to ensure a smooth merger, but in the press release announcing the Tyson-Hillshire agreement, Tyson president and CEO Donnie Smith said plenty of work would be put into the transition.

“As we begin planning how to bring these companies together, we intend to proceed in a thoughtful manner that honors the strengths embedded in both cultures that have made each of them successful,” Smith said.

 

Federal Review

A July 24 letter sent by the Food and Water Watch to William J. Baer, an assistant attorney general at the Antitrust Division of the DOJ, sheds light on the fears generated by the merger.

Among the chief concerns expressed in the letter, signed by 82 industry, community and faith-based groups in opposition to the deal, is that it would create a monopoly.

“The Department of Justice should vigorously examine all proposed food and agribusiness mergers to prevent any firm from exercising unfair market power over farmers, consumers and rural communities, including the proposed Tyson-Hillshire merger,” read the letter.

The language in the proposed settlement agreement was blunt. Though extensions are available, Tyson has 90 days to sell Heinold and “must take all reasonable steps necessary to accomplish the divestiture quickly and shall cooperate with prospective purchasers.”

According to the settlement agreement, a Tyson-Hillshire merger would result in a company with control over 35 percent of all U.S. sow purchases, and that wouldn’t be good for pork farmers.

“As the transaction eliminates a significant competing bidder [Hillshire], bidding is likely to be less aggressive and farmers are likely to receive lower prices for sows,” according to the settlement agreement.

With the court-approved Heinold divestiture, that problem will be solved.

But the Food and Water Watch rejected the settlement, calling it harmful.

“The Justice Department should not have approved this merger until its anticompetitive impacts on consumers could be fully assessed,” Woodall said in an Aug. 27 statement. “The Justice Department should have investigated this merger … and divested more businesses before rapidly approving this mega-meat merger.”

 

Billion-Dollar Category

Tyson won the bidding war with Pilgrim’s Pride by landing its knock-out bid of $63 per share. Meanwhile, a merger agreement between Hillshire and Pinnacle Foods was terminated, with Tyson agreeing to pay the $163 million breakup fee on Hillshire’s behalf.

While the bid for Hillshire is by far the costliest, it is but the latest in a string of acquisitions for Tyson. Since February 2013, the company has purchased Don Julio Foods, Circle Foods and Bosco’s Pizza. Moves like that, along with Hillshire, reposition Tyson as a food company, not just a meatpacker.

Though Tyson is a much bigger company — $34.4 billion in 2013 sales compared to $3.9 billion for Hillshire — Hillshire has much better profit margins. Based on financial information submitted to the SEC, Tyson had a 2.4-percent net margin last year, whereas Hillshire’s net margin was 4.7 percent.

Hillshire has a strong foothold in the breakfast category, a category in which Tyson is eager to expand. According to Kay, breakfast is a $1 billion category and is the fastest growing segment in the prepared foods market. Tyson, in keeping with its trend toward prepared products, was a good fit for Hillshire, Kay said. That Tyson was willing to pay a premium for the Hillshire stock is understandable, even if the new debt load will challenge the company.

“Tyson is a financially conservative company, and in the past they’ve had a history of drawing down debt,” Kay said. “I think they have the confidence they can do the same again.”