SOLD!

by Steve Kay
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Tyson Foods had its eye on The Hillshire Brands Company for nearly a year.

The bigger you get, the more you can digest. Tyson Foods for years was content to grow internally and by gobbling up smaller poultry processors, allied companies and the occasional foodservice business. It even dipped its feet, rather disastrously, into the seafood business. Tyson’s big bite toward diversifying its business came in 2001 when it acquired IBP inc., the world’s largest red-meat company.

IBP, though, was largely a commodity red-meat business and Tyson was determined to move more into the prepared-foods sector. So, it made two small acquisitions last year and another in January this year. None of these, however, prepared the US meat industry or the food industry for the boldest and biggest play in industry history. This play was Tyson’s $8.55 billion offer on June 9 for Hillshire Brands to best an offer by global rival JBS SA.

Tyson’s acquisition of Hillshire, expected to be completed at the end of September, will transform a company that began as a feed and hatchery business in 1935 in Springdale, Ark. Tyson will move from being primarily a processor and marketer of fresh meat and poultry products, albeit with value-added products, to being a genuine food company, not unlike Hormel Foods.

 

 
Hillshire CEO Sean Connolly
and his team made Hillshire
arguably the most attractive
target in the packaged-meats
sector.

Three words sum up why Tyson was prepared to bet the farm on Hillshire: brands, breakfast and margins. Hillshire will bring to Tyson some of the most powerful packaged-meats brands in the world. These include six core brands, Jimmy Dean, Ball Park, Hillshire Farm, Aidells, State Fair and Gallo. Other brands include Sara Lee, Kahn’s and Bryan. The deal will vastly accelerate Tyson’s growth in the $1 billion breakfast-food category, the fastest-growing segment of the prepared-foods market, which it only entered this January.

Third, Tyson is buying a company with some of the best operating margins in the meat industry and with far larger margins than Tyson’s. In fiscal 2013, Hillshire had a net margin of 4.7 percent vs. 2.3 percent for Tyson. On an operating basis, Hillshire’s retail business had an 11.4 percent operating margin and its foodservice business a 7.3 percent margin. Tyson’s overall operating margin in 2013 was 4.0 percent. Hillshire’s $404 million in operating income in 2013, and what will most likely be a larger number in fiscal 2014, obviously appealed a lot to Tyson.

Initial acquisitions

Tyson’s early acquisitions reflected its roots as a feed supplier and hatchery, then a chicken raiser. But it didn’t make its first acquisition until 1962 when it bought an Oklahoma City poultry and egg distributor. It bought its first poultry processor a year later. Numerous acquisitions followed but most were confined to the poultry industry.

Tyson's early acquisitions were mostly in the poultry sector.

An early sign that Tyson wanted to broaden its reach into the food business was in 1983 when it acquired Mexican Original Inc., a corn and flour tortilla processing plant in Fayetteville, Ark. Its biggest acquisition came in 1989 when it bought Holly Farms for $1.29 billion. Three years later, it diversified into seafood when it bought Arctic Alaska Fisheries Corporation and Louis Kemp Seafood Company. But a write down of results in this division soured Tyson’s 1994 results and it posted a $2 million loss, its first in years. It eventually disposed of these assets.

By 1995, Tyson was the leading chicken firm in the US. But it was diversifying its operations to become more than just a poultry company, aiming to be a leader in all “center-of-the-plate” proteins. Nonetheless, it continued to grow its poultry business, acquiring the fourth-largest processor, Hudson Foods, in 1998 for $642.4 million. The move meant Tyson would control 30 percent of the US poultry market.

‘Prepared’ for the future

A seminal move came in 1998, when Tyson created the Tyson Prepared Foods Group, under which many of Tyson’s businesses realigned. The next year, it sold its seafood and pork groups. Then in 2001, it made its boldest move to diversify by acquiring IBP inc. for $4.4 billion. This made Tyson a $23 billion enterprise, responsible for processing nearly one-quarter of all meat sold in the US. It made Tyson the third-largest packaged-food company behind Philip Morris’s Kraft Foods division and ConAgra Foods, according to a Univ. of Arkansas market study.

Tyson took much of the decade to digest its IBP acquisition. Then in February last year, it renewed its intent to extend its packaged-foods portfolio. It acquired Don Julio Foods, Clearfield, Utah, a producer of flour and corn tortillas and salty snacks, including chips and pretzels. In June, it bought Circle Foods, which makes frozen and refrigerated hand-held Mexican foods, uncooked tortillas and Indian flatbreads. It continued this growth in prepared foods in January this year by acquiring Bosco’s Pizza Co., Warren, Mich., a producer of stuffed bread sticks and frozen pizzas.

The big fish

Tyson had had Hillshire in its sights for a year. It didn’t move earlier because it felt its management bench in its prepared-foods division wasn’t strong enough. Hillshire, meanwhile, was in the process of rebuilding itself after being spun-off from Sara Lee Corp. CEO Sean Connolly and his hand-picked team had done enough to make Hillshire arguably the most attractive target in the packaged-meats sector. Sales in fiscal 2013 were $3.92 billion and net income was $184 million. As part of its growth strategy, Hillshire last December agreed to acquire Pinnacle Foods for $4.3 billion, which would move Hillshire beyond packaged meats into other food lines.

Hillshire will bring to Tyson some of the most powerful packaged-meats brands in the world.

Tyson had likely prepared an offer for Hillshire by May. JBS’s US chicken company, Pilgrim’s Pride Corporation (PPC), jumped ahead with its May 27 unsolicited offer of $45 per share or $6.36 billion (including net debt). JBS’s move surprised many but those who have long followed JBS were not. JBS came out of nowhere in 2007 to acquire Swift and Co. It was also opportunistic in buying Smithfield Foods’ beef business and then snapping up a bankrupt PPC.

Tyson waited just two days to throw its hat in the ring with a $50 per-share bid worth $6.8 billion. PPC countered by raising its offer to $55 per share for a total enterprise value of $7.7 billion. But Tyson quickly raised its offer to $63 per share and JBS/PPC threw in the towel. Pinnacle then agreed to accept a $163 million termination fee from Hillshire (a fee that Tyson will pay) and Hillshire accepted Tyson’s offer. Both announced definitive agreements on July 2.

The $8.55 billion transaction, which includes $7.7 billion in cash plus Hillshire’s net debt, was nearly $1 billion above PPC’s offer. JBS was mindful of the fact that even its $55 offer would have raised its net debt to EBITDA (earnings before interest, taxation, depreciation and amortization) ratio from 3.4 times to a four-year high of five times EBITDA. Winning Hillshire would likely have given it a nasty financial headache.

After the bell

Why did these two giants slug it out? As noted earlier, because of margins and brand domination. JBS in the past two years has repeatedly said it wants to grow the value-added size of all its meat and poultry businesses.

“With the acquisition of Hillshire Brands, not only will Tyson Foods have the No. 1 brands of chicken and stacked pack bacon, we‘ll also have the No. 1 brands for sausage, breakfast sandwiches, hot dogs, corn dogs and super-premium sausage.” — Tyson Foods CEO Donnie Smith.

But both companies know their protein businesses are subject to cyclical reversals. Tyson won the bidding war because it has a stronger balance sheet and deeper pockets than JBS/PPC. And it was determined to transform itself into more of a food business than a processing company, even at the risk of a negative response from its shareholders. In a presentation to analysts, Tyson said the acquisition would create a $40 billion, consumer-centric, insights-driven marketing organization with superior supply chain capabilities.

Tyson also emphasized that it would be getting a “strong portfolio of iconic, market-leading brands.” It noted that Jimmy Dean is the No. 1 breakfast sausage and frozen protein breakfast brand. Hillshire Farm is the No. 1 smoked sausage brand and No. 2 branded lunchmeat brand. Other No. 1 brands are Ball Park in hot dogs, State Fair in corn dogs and Aidells in premium sausages. The acquisition would make it No. 2 in the frozen-food category in retail behind Nestle, it added.

Tyson also noted how Hillshire would complement Tyson’s product portfolio and significantly lift margins in its prepared-foods’ segment. Prepared foods currently accounts for 9 percent of Tyson’s revenue and 5 percent of operating income. With Hillshire, it would account for 18 percent of revenue and 20 percent of operating income. “We have a unique opportunity to transform an important segment of our business and position Tyson to meet American consumers’ growing demand for protein at breakfast and throughout the day,” President and CEO Donnie Smith said on July 2.

Smith had earlier called Tyson’s winning bid a defining moment for the company. This seemed almost an understatement. Tyson’s acquisition of Hillshire will create a US protein/food company that might not be matched in consumer strength for many years.

Steve Kay is editor and publisher of Petaluma, Calif.-based Cattle Buyers Weekly (www.cattlebuyersweekly.com).

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