Analysts buzzing over Hillshire acquisition offers
by Bryan Salvage
CHICAGO – Just as summer is starting to heat up throughout the United States, so is interest in acquiring The Hillshire Brands Co. from two of industry’s largest companies: Tyson Foods Inc. and Pilgrim’s Pride Corporation.
Following Tyson Foods Inc.’s recent, unsolicited offer to acquire The Hillshire Brands Co., Fitch Ratings has revised the ratings to “stable” from “positive”. Fitch explained this rating action was driven by Tyson's May 29 offer to acquire Hillshire for $50 per share or $6.8 billion including what Tyson officials say is approximately $500 million of net debt. The price also includes $163 million to cover the termination fee payable to Pinnacle Foods Inc. (if Tyson's proposal is accepted).
Fitch explained the transaction multiple is approximately 13.4x and represents a 35 percent premium to Hillshire's stock price on May 9, 2014, the day prior to its announced agreement to acquire Pinnacle for $6.6 billion.
Tyson's pro forma total debt-to-operating EBITDA, assuming 100 percent debt-financing, would be in the low 3.0x range, Fitch estimates, but it views Tyson's willingness to issue equity in order to maintain investment grade favorably. For the LTM period ended March 29, 2014, Tyson's total debt-to-operating EBITDA was 0.9x and Hillshire's was 1.7x. Total adjusted debt-to-operating EBITDAR (defined as total debt plus 8x gross rent-to-operating EBITDA plus gross rent) was 1.5x for the period. Pro forma free cash flow (FCF) was $800 million.
The ratings affirmation and Stable Outlook reflect the current offer and Fitch's expectation that leverage can decline to the low-to-mid-2.0x range within 12- 18 months of transaction closing. Tyson's currently low leverage and significant cash flow generation from a combined Tyson/Hillshire entity should allow for rapid deleveraging.
Tyson’s potential acquisition of Hillshire is in line with its strategy of expanding in prepared foods and value-added products, further diversifying the company away from lower-margin commodity meats, Fitch relays. And given Tyson's No. 2 position in US pork production and the combined entities infrastructure in prepared foods, substantial supply-chain and production-related synergies are anticipated. For the LTM period, Tyson's operating EBITDA margin, as calculated by Fitch, was 6.2 percent; Hillshire's was 13.8 percent. This proposed transaction should be immediately accretive to Tyson's margins.
Meanwhile, Fitch views the takeover bid by Pilgrim's Pride Corporation of The Hillshire Brands Company as credit neutral for JBS SA, which has a 75.3 percent stake in PPC. If completed under current terms, PPC would acquire Hillshire in a transaction valued at $6.4 billion. The transaction would enhance PPC's competitive position in branded food products and would expand JBS's global presence. Leverage, at the proposed acquisition price, would increase for about 12 months beyond Fitch's expectation for its 'BB-' foreign currency IDR of JBS.
PPC plans to finance the acquisition with debt that would be non-recourse to JBS. Its $45 per-share offer represents a 25 percent premium to the volume weighted average price of Hillshire shares over the 10 trading days following the announcement by Hillshire of its intent to acquire Pinnacle Foods for a deal valued at $6.6 billion. PPC's transaction is based upon a 12.5x multiple relative to Hillshire's trailing adjusted EBITDA, including a $163 million termination fee payable to Pinnacle. It is anticipated the proposed transaction would close in the third quarter of 2014 and would be subject to customary closing conditions and the termination of Hillshire's merger agreement with Pinnacle.
This transaction would create a leading branded, protein-focused company with strong earnings potential and complementary businesses, Fitch relays. Key brands under the combined companies would include Pierce, Wing Dings, Jimmy Dean, Hillshire Farm, Ball Park and State Fair -- which are all either number one or number two in their respective markets. PPC's expertise in foodservice brand and supermarket deli would complement Hillshire's experience in retail.