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Hillshire Brands to Acquire Pinnacle Foods for $4.3 Billion

Hillshire Brands to Acquire Pinnacle Foods for $4.3 Billion

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Hillshire Brands will buy Pinnacle Foods, the makers of Bird's Eye, Vlasic, Aunt Jemima, and other grocery store staples

Hillshire will acquire familiar grocery brands like Mrs. Butterworth, Aunt Jemima, Vlasic, and others.

Hillshire Brands, the company behind Hillshire Farm, Jimmy Dean, Ball Park, and Sara Lee frozen bakery, announced on May 12th that it will acquire Pinnacle Foods, for $4.3 billion. Including the company’s debt, the deal is estimated to be worth $6.6 billion.

The purchase of Pinnacle Foods, which includes Birds Eye, Vlasic, Aunt Jemima, and Hungry Man, will considerably extend Hillshire’s reach in supermarkets across the country.

Sean Connolly, Hillshire’s CEO, told Crain’s Chicago that although it was too soon to tell whether the company would retain all of Pinnacle’s brands, they would likely invest heavily in the strongest brands.

"Meats go with vegetables, sandwiches go with pickles," Connolly said of the deal.

In April, Hillshire also announced the purchase of Van’s Natural Foods, which makes gluten-free products like cereal and snack bars. In September 2013, Hillshire acquired Golden Island, the makers of gourmet jerky products, for $35 million.

Karen Lo is an associate editor at The Daily Meal. Follow her on Twitter @appleplexy.

Parsippany-based Pinnacle Foods sold to Hillshire Brands for $4.3 billion

Pinnacle Foods, maker of Vlasic brand pickles, has been bought by Hillshire Brands for about $4.3 billion.

Parsippany-based Pinnacle Foods has been acquired by Hillshire Brands, the maker of Jimmy Dean meats, for about $4.3 billion, gaining products such as Birds Eye frozen foods, Duncan Hines baking mixes and Vlasic pickles.

Investors will receive $18 in cash and half a share of Hillshire Brands for every Pinnacle share they own, the companies said today in a statement. The total amount is almost 20 percent higher than Pinnacle’s closing price on Friday, the most recent trading day. Including debt, the deal is valued at about $6.6 billion.

The purchase, Hillshire’s third in less than a year, lets it add frozen-food brands such as Hungry-Man, giving the company a larger presence in grocery stores. Hillshire Chief Executive Officer Sean Connolly, who will run the combined business, is buying Pinnacle about a year after the business’s initial public offering. Blackstone Group LP had acquired Pinnacle for $2.2 billion about seven years ago and took it public again.

“The acquisition creates a leading branded food company with enhanced scale, reach and capabilities, while providing margin expansion,” Connolly said in the statement.

Shares of Chicago-based Hillshire rose 2.8 percent to $38 in early trading. Pinnacle jumped as much as 27 percent to $38.76.

Pinnacle Foods No Longer at the Top of Hillshire's To-Do List

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time. Having made the streets safe for Truth, Justice, and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. His coverage reflects his passion for motorcycles, booze, and guns (though typically not all exercised at the same time), but his writing also covers the broader sectors of consumer goods, technology, and industrials. So follow along as he tries to break down complex topics to make them more understandable and useful to the average investor. Have a story idea? Contact Rich here. I may not be able to respond to every suggestion, but I do read them all! Think an article needs a correction? Reach Rich here.

Not surprisingly, Hillshire Brands (NYSE:HSH.DL) is withdrawing its $4.3 billion bid to purchase Pinnacle Foods (NYSE: PF) . Originally hailed as a perfect blend of meat and vegetables, sandwiches and pickles, the acquisition attempt quickly went off the rails following competing bids from Pilgrim's Pride (NASDAQ:PPC) and Tyson Foods (NYSE:TSN) to take over packaged-meats maker Hillshire.

The only caveat to either offer was that Hillshire drop its acquisition of Pinnacle, maker of Vlasic pickles, Wish-Bone salad dressing, and a host of other food brands. W ith Tyson coming out on top with an offer of $63 per share, or $7.7 billion, Hillshire found the price simply too rich to reject. And this morning the owner of Jimmy Dean sausages made it official that it was withdrawing its offer. As a consolation prize, Pinnacle Foods will receive a $163 million termination fee .

Tyson investors, however, must now be concerned that their company is overpaying for the privilege of buying Hillshire. At a time when the economy seems to be going sideways, consumer spending is soft, and protein prices are hitting new records due to drought and disease, Tyson will issue new debt and maybe even new stock to complete the deal.

Although it's getting kicked to the curb, Pinnacle may still be a tasty morsel for someone, though not likely any of the losing players in the Hillshire bidding war.

Pilgrim's was looking to acquire Hillshire because its parent, Brazilian meat processor JBS, wanted to diversify away from the low-margin business of selling meat to supermarkets and believed Hillshire would give it a portfolio of brand-name products that could boost its bottom line. While Pinnacle has brand-name power of its own, it would be more an example of Peter Lynch "diworsification" -- buying beyond your core competency. But to a company such as ConAgra or Kraft Foods , it might be a more natural fit.

Pinnacle itself has been willing to play the M&A game, having bought the Wish-Bone salad dressings business from Unilever for $580 million last summer. But with grocery store frozen-food sales stalling as consumers search out fresher, more wholesome options, the premium it would have garnered from Hillshire's offer may not be in the offing again.

Fresh produce is the fastest-growing department in grocery stores, according to the market analysts at Nielsen. Counted as a bundle with meat and deli items, produce grew 7% last year to reach $100 billion in sales. Sales of frozen foods, on the other hand, were flat at $50 billion in sales in 2013 .

Hillshire Brands rightly urged its investors to back the board of directors' decision against the still- pending buyout offer for Pinnacle Foods. Now that it is a free agent again, and now that its rivals know it is in the market, expect Pinnacle to be on top of someone's shopping list real soon.

Dow, Hologic Named NAM Manufacturing Leaders of the Year

Digital and cultural transformation get nods, while a special category honors pandemic response.

The 2021 winners of the Manufacturing Leadership Awards were honored at the 17th annual Manufacturing Leadership Awards Gala, hosted by the National Association of Manufacturers’ Manufacturing Leadership Council. For the second year in a row, the gala took place as a virtual event.

Dow was named the Large Enterprise Manufacturer of the Year for its enterprise-wide digital transformation encompassing manufacturing, logistics and operations. Hologic was named the Small/Medium Enterprise Manufacturer of the Year for its workforce cultural transformation, which has positioned the company to take advantage of advanced manufacturing technologies, such as data analytics, 3D printing and machine learning.

Through innovation, “we’ve made great strides in defeating COVID-19 and creating the manufacturing workforce of the future,” said MLC co-founder, Vice President and Executive Director David R. Brousell in a statement. He added, “The past year was possibly the most challenging in modern history for manufacturing operations. But we also saw how critical modern manufacturing is to our society and to our quality of life.”

This year, the MLC also unveiled its Creators Respond Honor Roll, an acknowledgement of all nominations that were directly tied to pandemic response. The honorees included:

  • ALOM Technologies
  • Anheuser-Busch InBev
  • Bridge Publications Inc.
  • Dow Inc.
  • Flex
  • IBM
  • Mallinckrodt Pharmaceuticals
  • Merck & Co., Inc.
  • Roche and Genentech
  • Smithfield Foods

Also announced at the gala were this year’s High Achievers, the projects with the highest scores in each

The Pros and Cons Of Hillshire Brands' Pinnacle Deal

Hillshire Brands recently announced plans to acquire Pinnacle Foods for $4.3 billion in a cash and stock transaction. Pinnacle Foods manufactures, markets, and distributes frozen vegetables, seafood, pizza, and bagels. It also sells cake mixes, salad dressings, table syrup, and pastry fruit fillings. The company generates annual sales revenue of around $2.5 billion.

Pinnacle estimates that more than 85% of American households buy at least one of its products. The company also flaunts holding one of the top 2 brands in 10 out of the 13 product categories it operates in. However, many Hillshire Brands investors including Eminence Capital LLC, one of the meat company's 20 largest shareholders, have questioned the deal. Here, we take a look at some of the pros and cons of Hillshire Brands’ Pinnacle Acquisition.

Formerly known as Sara Lee Corporation, Hillshire Brands began trading under the HSH symbol on June 29, 2012, following the spin-off of its international coffee and tea business. It sells a variety of packaged meat products including hot dogs, corn dogs, breakfast sausages, dinner sausages and deli meats, as well as a variety of frozen baked products. These products are sold through the retail channel to supermarkets, warehouse clubs and national chains in North America. The company also sells a variety of meat and bakery products to foodservice customers in North America.

We currently have a $42 price estimate for Hillshire Brands, which we will soon update based on the recent announcement.

  • Increased Diversification: Hillshire Brands’ current product portfolio is highly meat-centric. Some of the company’s key product categories include hot dogs, breakfast sausages, premium deli and luncheon meats. Therefore, meat commodities such as pork, beef, and poultry are some of its key raw materials. Wholesale prices of these commodities are very volatile, which increases Hillshire Brands’ operating risk. For example, wholesale beef and pork prices have been soaring higher this year on supply side constraints. In order to reduce the margin impact of higher input costs, the company has already taken pricing measures in some categories and plans to extend it further. However, price increases generally erode volume market share, which is not easily regained and requires investments in advertising and marketing later on. Therefore, we believe that a broader product portfolio that includes Bird's Eye frozen vegetables and Vlasic pickles would reduce Hillshire Brands’ sensitivity to the volatility in meat commodity prices and help it sustain more stable margins.

    Higher Debt Load: Hillshire Brands’ debt load is expected to increase significantly after the deal. This is because the cash that it is supposed to pay to Pinnacle shareholders (around $2.1 billion) will be mostly financed through a term loan from Goldman Sachs since its ending cash balance was just over $200 million at the end of the last quarter. Moreover, its own long-term debt was around $1 billion in March and on top of that, it will also inherit

$2.5 billion of Pinnacle’s debt. This implies that the combined company will have a total debt of over $5.5 billion. Standard & Poor’s rating agency indicated that the debt load would increase Hillshire Brands’ leverage to nearly 5x EBITDA. This compares to a debt/EBITDA ratio of just over 2 in 2013. A higher debt load weighs on the company’s credit ratings, which results in higher yields, and it also increases the required rate of return on equity. This is because there is higher risk involved for equity-holders in a company with higher debt. Hillshire Brands has already indicated that it will be suspending its current share repurchase program in order to reduce leverage. Therefore, Pinnacle acquisition could make it a less attractive equity investment.

3% y-o-y due to increased private label competition in salad dressings and gelatin desserts. This could potentially lead to a negative volume-mix effect and offset some of the gains Hillshire Brands expects to realize from the acquisition of Pinnacle Foods.

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Hillshire Brands Finalizes Merger With Tyson Foods

Hillshire Brands recently entered into a definitive merger agreement with Tyson Foods. The announcement came just a couple of days after Pinnacle Foods terminated its merger agreement with Hillshire Brands. Announced on May 12, the $6.6 billion Hillshire-Pinnacle deal (including debt) was broadly criticized by analysts and investors alike. It also led to a fierce bidding war between two of the world's largest meat processing companies that are riding high on surging meat prices for Hillshire Brands.

Tyson Foods eventually won the bidding war against JBS-backed Pilgrim's Pride as it offered to buy the maker of Jimmy Dean breakfast sausages for $63 per share in cash, beating Pilgrim's Pride's final offer by $8 per share. However, we believe that in the heat of the bidding war, Tyson Foods has significantly overpriced Hillshire Brands and could find it difficult to justify the valuation in the long run.

Formerly known as Sara Lee Corporation, Hillshire Brands began trading under the HSH symbol on June 29, 2012, following the spin-off of its international coffee and tea business. It sells a variety of packaged meat products including hot dogs, corn dogs, breakfast sausages, dinner sausages and deli meats, as well as a variety of frozen baked products. These products are sold through the retail channel to supermarkets, warehouse clubs and national chains in North America. The company also sells a variety of meat and bakery products to foodservice customers in North America.

We currently have a $41 price estimate for Hillshire Brands, which values it at around 11.5x our CY2014 adjusted EBITDA estimate for the company.

Springdale, Arkansas-based Tyson Foods is the world's second largest meat processing company only behind Brazilian JBS S.A., which owns a majority (75%) stake in Pilgrim's Pride. Tyson Foods derives 87% of its sales from highly commoditized beef, pork, and chicken products. The business is fraught with inherent problems such as volatile feed costs (mostly corn and soybeans) and negligible pricing power. Tyson Foods' last twelve months operating margin stood at just around 4.5%, less than half of Hillshire Brands'. This is primarily because Hillshire Brands has significantly higher pricing power, which comes from the perceived value of its brands like Jimmy Dean and Ball Park. Therefore, Tyson Foods wants to increase the proportion of higher-margin sales in its portfolio and reduce its operational risk by acquiring Hillshire Brands.

This year has been extremely good for meat processing companies so far because of higher pork, beef and chicken prices in the U.S. Beef prices are up because of the severe drought in the U.S. in 2012 that shrunk the nation's cattle herd to its smallest size in over 60 years. On the other hand, pork prices are rising because of the growing spread of porcine epidemic diarrhea virus or PEDv, which has killed millions of piglets across 28 states since last spring. Rising red meat prices have also sent the demand for chicken, the cheaper meat, to its highest level in three years. Riding high on the surge in meat prices, two of the world's largest meat processing companies, Tyson Foods and JBS-backed Pilgrim's Pride, entered into a bidding war for Hillshire Brands.

Tyson Foods eventually won the bidding war with an offer that valued Hillshire Brands' equity at

$8 billion, a 70% premium to its closing price on May 9, which was the last traded price just before Hillshire Brands announced its plans to acquire Pinnacle Foods on May 12. However, including the assumption of Hillshire Brands’ net outstanding long-term debt of .55 billion and the $163 million termination fee associated with the termination of Hillshire Brands' merger agreement with Pinnacle Foods, the deal is valued at $8.71 billion.

We believe that in the heat of the bidding war, Tyson Foods has overpriced Hillshire Brands. Even if the company is able to realize anticipated cost synergies from the deal, it could still find it difficult to justify the steep valuation in the long run. In a three-year period following the deal, Tyson Foods expects to realize annual cost savings of around $300 million from the Hillshire Brands' acquisition. We can visualize the impact of this on Hillshire Brands' valuation by adjusting our current forecast for the company's Retail EBITDA Margin driver in our model to reach around 19% in the long run.

All else remaining constant, this would increase Hillshire Brands' price estimate to around $57.5 per share, which is more than $5 per share below what Tyson Foods is paying for the company. Therefore, according to our estimates, Tyson Foods would also have to grow Hillshire Brands' sales revenue at an average annual rate of at least 4.5% apart from realizing cost savings in order to justify the price it plans to pay for the company. Just to give some perspective, Hillshire Brands' average annual sales revenue growth rate has been just around 0.7% for the past 3 years.

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Hillshire Brands to acquire Birds Eye, Vlasic maker Pinnacle Foods

Hillshire Brands Co. is making a big bet on the power of combinations such as Jimmy Dean sausage with Birds Eye vegetables or a Vlasic pickle alongside a sandwich made with Hillshire Farm lunchmeat as it gets ready to buy Pinnacle Foods Inc. for about $4.3 billion in cash and stock, plus the assumption of nearly $2.4 billion in debt.

Combined, Hillshire and Pinnacle have roughly $6.6 billion in annual sales. The acquisition, announced on Monday, would make Hillshire the third-largest player in the frozen section of the grocery store.

“These portfolios complement one another,” Hillshire CEO Sean Connolly said in an interview. Hillshire, which has beefed up through acquisitions and continues to hint at additional small deals, is “focused on building the best possible business we can build,” Connolly said.

Both companies focus on brand name convenience foods. Pinnacle can help Hillshire expand its presence around the grocery store, including in the frozen aisles where Pinnacle sells items ranging from Aunt Jemima breakfasts to Hungry-Man dinners and Hillshire’s products include Jimmy Dean Delights breakfast sandwiches. It should bolster Hillshire’s presence in the packaged food aisles, where Pinnacle’s products include Mrs. Butterworth’s syrup and Duncan Hines cake mix.

Right now, Hillshire is the seventh-largest seller of branded frozen foods in the United States and Pinnacle is the eighth, according to IRI sales data provided by Hillshire. The combination will vault Hillshire into the No. 3 spot, behind Nestle and ConAgra.

Shares of Chicago-based Hillshire fell after the deal was announced and ended the day down 3.2 percent at $35.76. Pinnacle’s shares jumped more than 13 percent to $34.47.

Some investors may have been hoping for Hillshire to be taken over instead of the company going out and making a large purchase. Pushing further into products beyond the meats it is known for could make it harder for Hillshire to be an acquisition candidate itself, analysts say.

Hillshire executives say they see opportunity in expanding beyond meat, especially into foods with convenience and health and wellness attributes. Just three weeks ago, Hillshire announced its plan to buy Van's Natural Foods, a maker of products such as frozen waffles, for $165 million.

“Although we can see some logic behind the combination of lunchmeat and pickles, along with waffles and syrup, the connections seem a bit thinner than what we hope for in most food transactions,” said J.P. Morgan analyst Ken Goldman.

The combined company will have three brands each with more than $1 billion in annual sales: Hillshire Farm and Jimmy Dean from Hillshire, and Birds Eye from Pinnacle.

Private equity firm Blackstone Group LP, which owns about 51 percent of Pinnacle, has agreed to vote in favor of the deal, the companies said. Blackstone will own about 16 percent of Hillshire’s stock after the deal closes, making it the company’s largest holder. A representative from Blackstone will also get a seat on Hillshire’s board.

The planned acquisition continues a string of deals at Hillshire and in the industry overall. Some food makers are trying to sharpen their focus while others are adding to their portfolios, hoping to stand out with retailers. In the first quarter of 2014, five deals announced in the retail and consumer sector had transaction values of more than $1 billion, according to PwC.
Hillshire Brands was formed in June 2012 when Sara Lee split to form two publicly-traded companies, the other being its European coffee-and-tea business, D.E Master Blenders 1753.

Just last week, Mondelez International Inc. and D.E. Master Blenders announced plans to blend their coffee businesses into one company. Cereal maker Post Holdings Inc., which was spun off from Ralcorp Holdings in 2012, said in April it would buy Michael Foods Inc., a maker of processed eggs and other food products. Ralcorp, which makes private label foods, itself was acquired by ConAgra in 2013.

Blackstone took Pinnacle private for about $2.2 billion in 2007 and Pinnacle returned to the stock market in March 2013. The company’s products range from recently acquired Wish-Bone salad dressing to Vlasic pickles. While Pinnacle has several well-known brands, they compete against larger brands in some categories and often against retailer’s private brands.

Under the terms of the agreement, each share of Pinnacle Foods common stock will be exchanged for $18 in cash and half a share of Hillshire Brands common stock. The deal is valued at about $2.16 billion in cash, $2.15 billion in stock and the assumption of nearly $2.4 billion in Pinnacle Foods debt.

Hillshire said it expects the Pinnacle deal to immediately add to earnings and generate $140 million in annual cost savings three years after the deal closes. The acquisition is expected to close by September.

Connolly said it was too early to tell whether the company would close additional plants or make any other big changes such as layoffs. Both companies already run “pretty lean” cost structures, he said.

Chicago-based Hillshire is home to Hillshire Farm, Ball Park, Jimmy Dean, and State Fair meat products, as well as the artisanal brands Aidells, Gallo and Golden Island. The company also serves up Sara Lee's line of frozen desserts, including cheesecake.

Pinnacle, based in Parsippany, N.J., traces its roots back to Chicago. According to the company, Philip Danforth Armour formed Armour and Co. in 1867. It was the first company to produce canned meat and the business helped cement Chicago and its stockyards as the heart of the American meatpacking industry. Today, Armour canned meats are part of Pinnacle’s lineup.

Under certain circumstances, if the deal falls apart Pinnacle would have to pay Hillshire a breakup fee of $141 million or Hillshire would have to pay Pinnacle a breakup fee of $163 million, the companies said.

Why Hillshire Brands (HSH) Stock Is Down Today

NEW YORK (TheStreet) -- Hillshire Brands  (HSH) fell Monday amid news that the company would acquireਊll outstanding shares of Pinnacle Foods  (PF) ਏor approximately $4.3 billion.

Each share of Pinnacle Foods common stock will be exchanged for $18 in cash and 0.5 shares of Hillshire Brands common stock under the terms of the agreement.

The stock closed down 3.25%, or $1.20, to $35.75. More than 20.6 million shares changed hands, which eclipsed the average volume of򠥓,243.

Separately, TheStreet Ratings team rates HILLSHIRE BRANDS CO as a "hold" with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate HILLSHIRE BRANDS CO (HSH) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company&aposs strengths can be seen in multiple areas, such as its revenue growth, notable return on equity and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • HSH&aposs revenue growth has slightly outpaced the industry average of 2.6%. Since the same quarter one year prior, revenues slightly increased by 3.4%. This growth in revenue does not appear to have trickled down to the company&aposs bottom line, displaying stagnant earnings per share.
  • The company&aposs current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Food Products industry and the overall market, HILLSHIRE BRANDS CO&aposs return on equity significantly exceeds that of both the industry average and the S&P 500.
  • HILLSHIRE BRANDS CO reported flat earnings per share in the most recent quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, HILLSHIRE BRANDS CO turned its bottom line around by earning $1.49 versus -.12 in the prior year. This year, the market expects an improvement in earnings ($1.72 versus $1.49).
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Food Products industry. The net income has significantly decreased by 54.8% when compared to the same quarter one year ago, falling from $93.00 million to $42.00 million.
  • Currently the debt-to-equity ratio of 1.57 is quite high overall and when compared to the industry average, suggesting that the current management of debt levels should be re-evaluated. Along with the unfavorable debt-to-equity ratio, HSH maintains a poor quick ratio of 0.81, which illustrates the inability to avoid short-term cash problems.
  • You can view the full analysis from the report here: HSH Ratings Report

Editor&aposs Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

Hillshire Brands Agrees To Acquire Pinnacle Foods For $6.6 Billion

The Hillshire Brands Company (NYSE:HSH) agreed to acquire Pinnacle Foods Inc. (NYSE:PF) in a cash and stock deal valued at $6.6 billion, including debt, the two companies said on Monday.

Hillshire, the maker of Jimmy Dean meats, said the acquisition will "create a platform with new revenue opportunities" and expand its reach into the frozen and refrigerated foods segment with such brands as Hungry-Man and Birds Eye as well as grocery staples such as Duncan Hines baking mixes and Vlasic pickles.

Pinnacle investors will receive $18 in cash and half a share of Hillshire for every Pinnacle share they own. Excluding debt, the deal is valued at $4.3 billion. The total amount of the purchase price represents a 20 percent premium over Pinnacle's closing share price of $30.45 on Friday. In midday trading on Monday, the shares rose $4.46, or 14.6 percent, to $34.91.

The combined company will be based in Chicago and will operate under the Hillshire Brands name. The boards of both companies have approved the deal, which is expected to close in September. The companies said that the deal reflects a multiple of 9.6 times adjusted earnings before interest, taxes, depreciation and amortization.

Hillshire said the acquisition will also position it to take advantage of future expansion opportunities.

“The acquisition creates a leading branded food company with enhanced scale, reach, and capabilities while providing margin expansion and strong [earnings per share] accretion," Hillshire Brands CEO Sean Connolly said.

Pinnacle Foods CEO Bob Gamgort added that the “complementary portfolios and strategic fit of these two companies create significant value for the shareholders of both organizations."

Why Hillshire Brands Would Be Smart to Drop Its Bid for Pinnacle Foods

When you think of mergers and acquisitions, a number of sectors come to mind. The food industry probably isn't one of them. Food companies are typically the slow-and-steady types, which is indicative of the business they operate in. That being said, one of the merits of investing in giant food producers is the stability of their business models.

But suddenly, the food industry is proving to be far more exciting than you'd ever imagine. Just two weeks ago, Hillshire Brands (NYSE:HSH.DL) offered to buy smaller rival Pinnacle Foods (NYSE: PF) for $6.6 billion including debt. Now, both Pilgrim's Pride (NASDAQ:PPC) and Tyson Foods, (NYSE:TSN) have tossed their hats into the ring by each making offers to buy Hillshire. Pilgrim's Pride is offering to buy Hillshire in an all-cash deal valued at $6.4 billion. For its part, Tyson is one-upping Pilgrim's Pride with a $6.8 billion offer.

Keeping it simple by consolidating
If all this craziness seems overwhelming, there's actually a simple strategy employed by these companies: Produce growth by buying it. Organic growth is hard to come by in the food industry. Mature markets like North America are saturated, and as a result growth is more or less limited to population growth. But buying out other companies can produce instant growth as well as future benefits from cost synergies.

After news of the offer from Hillshire to acquire Pinnacle Foods, I wrote against the idea, saying the deal too richly valued Pinnacle. Apparently, both Pilgrim's Pride and Tyson feel the same way and will each force Hillshire to drop its bid for Pinnacle as part of their offers. Here's why Hillshire would be wise to take the offer from Tyson, and cut Pinnacle Foods loose.

Hillshire should walk away from the table
Hillshire's proposal to buy Pinnacle Foods makes strategic sense but is problematic financially. It's true that the diversity offered by Pinnacle Foods' product portfolio would allow Hillshire to extend its reach to nearly every aisle of the grocery store. If Hillshire acquires Pinnacle Foods, it will control a total of 10 brands that hold the No. 1 or No. 2 position in their respective categories.

Still, the deal poses a problem from a financial perspective. Hillshire's offer pegs Pinnacle's value at $4.3 billion excluding debt. This values Pinnacle at about 14 times trailing earnings before interest, taxes, depreciation, and amortization and about 23 times trailing earnings. That's a fairly rich earnings multiple for Pinnacle, which produced revenue growth of less than 1% last year.

Overvaluation is now someone else's problem
Fortunately for Hillshire shareholders, they might not have to worry about their company undertaking a large, potentially dilutive deal now that Pilgrim's Pride and Tyson have come along. Pilgrim's offer alone sent shares of Hillshire up 22% in a single day. Pilgrim's Pride is offering about $45 per share for Hillshire.

Tyson is offering even more, roughly $50 per share for Hillshire. That would value Hillshire for about 29 times trailing earnings.

Hillshire investors should breathe a sigh of relief that their company didn't take them on an ill-fated acquisition campaign. Pilgrim's Pride and Tyson are better suitors for Hillshire than Hillshire is for Pinnacle. That's because Pilgrim's Pride, Tyson, and Hillshire hold primarily meat brands. It makes more sense for Hillshire to team up with a larger protein producer in the same industry than it does to buy a frozen-vegetables company like Pinnacle.

Still, paying 29 times trailing earnings for Hillshire represents a lofty multiple for a company with a fairly unimpressive growth profile. Hillshire reported a 1% drop in sales in fiscal 2013 after just a 2% increase in sales in the previous fiscal year.

Foolish takeaway
The U.S. food industry is inevitably marked by slow growth. People always need to eat, which means profits stay afloat when the economy takes a nosedive. But the opposite is true as well. When the economy recovers, food companies generally miss out on huge growth.

That means food companies are turning to acquisitions as a way to generate growth. Hillshire Brands was on the cusp of an expensive takeover pursuit of Pinnacle Foods, but that's in doubt now that it has its own potential buyer. Pilgrim's Pride and Tyson have each stepped in with offers for Hillshire and they both would require Hillshire to drop its bid for Pinnacle as part of the takeover. Whether it's Pilgrim's Pride or Tyson that scoops up Hillshire, Hillshire would be wise to take the offer and cut Pinnacle Foods loose.

Watch the video: Associated Foods (May 2022).


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