Tyson Foods confirms $2.16 billion acquisition of Keystone Foods

Tyson Foods confirmed Monday (Aug. 20) it will acquire West Chester, Penn.,-based Keystone Foods for $2.16 billion in cash as it seeks to grow its prepared foods and international segments. Keystone is owned by Brazilian based Marfrig Global Foods.

Tyson said it will finance the acquisition with new debt, and it will take three years before the deal is likely accretive to earnings, though it expects to bolster profits sooner on an adjusted basis, excluding transaction costs.

Tyson picks up six processing plants and an innovation center in the U.S. with locations in Alabama, Georgia, Kentucky, North Carolina, Pennsylvania and Wisconsin, and eight plants and three innovation centers in China, South Korea, Malaysia, Thailand and Australia. Keystone has around 11,000 employees. Tyson expects the deal will close by mid-2019, subject to regulatory approval.

Tyson Foods CEO Tom Hayes said Keystone will be a great addition and represents an important step in Tyson’s longer term growth strategy. He said Keystone’s footprint in high growth markets in the Asia Pacific region and abilities to export to markets in Europe, the Middle East and Africa, will provide a significant foundation for international growth. In addition to the international boost, Hayes said “this acquisition will also expand Tyson’s value-added production capabilities and help us deliver more value to our foodservice customers.”

Keystone is a major supplier to quick-serve restaurant chains such as McDonald’s. Last year, the company had net revenue of $2.5 billion and adjusted gross earnings of around $211 million. Roughly 65% of Keystone’s revenue was derived from its U.S. operation and 35% came from international.

Tyson expects to generate annual synergies of approximately $50 million by the third year of the acquisition, driven by operational efficiencies, procurement savings, distribution and supply network optimization and other opportunities.

The Keystone acquisition at roughly $2.2 billion is less than Tyson paid for AdvancePierre at roughly $4 billion, which has already had considerable impact on the company’s prepared food sales. In the May earnings release, Tyson said AdvancePierre sandwiches and entreés brought in about $655 million for the first six months of this fiscal year in the chicken and prepared food segments. Tyson said it expects the acquisition to bring in about $1.3 billion in its first full fiscal year as part of the company.

Investors are somewhat neutral on the deal. Tyson shares were trading slightly higher on Monday following the announcement. Shares of Tyson Foods (NYSE: TSN) were trading around $62.78, up 37 cents in the morning session. Over the past 52-weeks Tyson shares have traded between $58.36 to $84.65.

Stephens Inc. Analyst Farha Aslam recently noted, ”We are not so sure the transaction makes business sense.” She said Tyson and Keystone are McDonald’s two largest suppliers and while the fast-food giant’s business is stable she notes it’s not high margin. She said another big deal after American Protein and AdvancePierre which closed about a year ago might be hard to pull off without raising execution risks. She also predicts market reaction would be mixed.

Debt analysts with Fitch Ratings affirmed Tyson’s investment grade credit rating on the heels of the transaction and maintaining the company’s stable outlook.

“Tyson’s acquisition of Keystone Foods is complementary to the existing portfolio, improves scale and is consistent with the company’s strategy of transitioning from a commodity meat and poultry processor to a higher margin protein-packed foods firm that should benefit from expanded growth opportunities in the Asia Pacific region as well as exports on key markets via a new international platform,” Fitch analysts noted.

Fitch expects Tyson’s total debt-to-EBITDA (gross earnings) at transaction to close in the 2.6x to 2.7x range. But said leverage should decline to 2.3x to 2.4x in the following year.

“Debt reduction will be a priority as Tyson suspends discretionary share buybacks and utilizes free cash flow to return net debt-to-EBITDA to the company’s targeted 1.5x – 2.0x range over the medium term.” Fitch notes.

Tyson recently lowered its fiscal earnings guidance to a range of $5.70 to $6 per share, down from the $6.55 to $6.70 range previously forecast. Tyson blamed tariffs and excess meat suppliers for the lower profits. While Tyson Foods said it was experiencing challenges in the chicken and pork segments, its fundamentals were strong as profits soared 21% in the third quarter ending June 30.

Hayes told the media during the recent earnings call Tyson would continue to look for acquisitions that could raise the company’s international growth footprint as well better serve its growing higher-margin agenda.