Deal or no deal: Hillshire Brands lists... and is in play
By Michelle Russell | 29 June 2012
Hillshire will have a focus on meat brands
Shares in Hillshire Brands, formerly part of Sara Lee, rose today (29 June) as the pure-play US meat company listed on the New York Stock Exchange. Michelle Russell takes a look at what lies ahead for the firm as analysts suggest it may become a takeover target.
Sara Lee, the maker of Jimmy Dean sausages, officially spun off its European coffee and tea business today, changing its name to Hillshire Brands, which is now listed in its own right on the US.
While officially a pure-play meat business from today, the company, which will also focus on frozen desserts and bakery products, had already outlined how it intends to drive growth post spin-off.
This focus of intent and its current assets, have led to speculation the company may now become a target for takeover.
Goldman Sachs analyst Jason English believes Hillshire's meat operations possesses "powerful" brands with "strong" share positions and premium pricing power in core packaged meat categories. Brands include Jimmy Dean, Ball Park, State Fair and its namesake Hillshire Farm, which Sara Lee acquired in 1971.
Hillshire also has a "sizeable" dividend income stream, English pointed out. "The firm intends to distribute a one-time US$3 special dividend to shareholders pre split. This reflects nearly 18% of the current share price and adds to the current underlying dividend yield of nearly 3%."
It is these assets that many analysts, including English, believe make Hillshire an attractive target for acquisition.
"It has a low cost manufacturing leadership position in sliced lunchmeat ... [and] the firm has potential strategic appeal to an upstream protein company seeking to enter or expand its presence in the value-added portion of the US meat value chain."
Bernstein Research analyst Alexia Howard believes a takeover of Hillshire Brands is "fairly likely".
"No other pure-play branded packaged meats companies of this size and with these kinds of brands and market shares have previously been available. This will be a transformational deal for whomever makes it, while others could be left behind, which could also create some urgency," she said.
Howard cites Hormel Foods, Tyson Foods, Smithfield Foods, Brazil's JBS and Brasil Foods as potential suitors. Hormel and Tyson, however, she sees emerging as the "two most likely winners" given their strategic rationale for the deal as well as their financial capability.
Of Hormel, Howard says: "Strategically, Hormel is the most similar to Hillshire Brands in that it has a number of brands such as Hormel, Spam and Jennie-O Turkey Store. However, Sara Lee's market shares are clearly higher in its key product categories than Hormel, and Sara Lee's position in chilled, rather than canned, meat products probably makes the Hillshire Brands business somewhat higher quality while leading to few antitrust issues."
Morningstar analyst Kenneth Perkins also believes Hormel and Tyson would be "interesting bidders" and most likely "at the top of the list".
"It would be a big deal for Tyson and Smithfield in terms of size," he told just-food.
A deal of this kind, however, may be far from the mind of CEO Sean Connolly who has already made clear his plans for the business.
Plans to make Hillshire "the most innovative meat-centric food company in the US" appear to be under way as the chief executive told investors earlier this month the company expects to drive top-line growth through innovation and increased brand support.
He said the new management team at Hillshire would be focused on "shoring up weak spots", such as NPD. While new products have made up about 9% of sales over the last four years, Connolly said that he aims to increase this figure to 13-15% by 2015.
Connolly admitted some of Sara Lee's meat brands have been "under-managed and have under-delivered". However, he added: "We will fix that".
Connolly joins Hillshire from Campbell Soup Co. where he helped bring to market innovations such as the V8 V- Fusion line of vegetable-fruit drinks. Since taking over Sara Lee's meat business in January, he has set up an R&D team, suggesting NPD will be top of its agenda.
"The approach, the experience he has with positioning brands and cultivating them, seems like the right way to go and he definitely has a lot of experience so that should help [Hillshire] to hopefully improve the business and put it in the direction it wants to go."
Connolly has said there is a "tangible" opportunity for growth in value-added products and Hillshire will refocus its business on higher-margin branded products, such as prepared meals, and away from a commodities meats business. He wants the company to be able to command a price premium and differentiate its offering from competitors.
He told Bloomberg Hillshire is introducing super-premium smoked Hillshire sausage, which typically commands higher prices and generates faster sales growth than mainstream brands in an attempt to attract foodies. He is also using Aidells, a gourmet sausage company Sara Lee bought a year ago, to help spread innovation to the rest of Hillshire Brands.
"They're trying to make sure the company looks more like a consumer packaged food firm that sells brands rather than just a meat processor and I think that's the right step," Perkins told just-food. "If you're just a meat processor and selling products that are basically a commodity, it's very difficult to charge a premium for your products.
"Execution will be the main thing. They want to change a lot of things and it's going to take time to do that. The plan sounds great but if they don't get their head around the business and things don't go as planned, that could definitely be a headwind."
As for whether Connolly has the ability to implement all of this and maintain a profit, is questionable.
"It's not an easy task. Not in the near term," Perkins said. "They want to invest behind their brands and they plan to increase their advertising spend pretty significantly in the next few years and if those investments don't pan out the way they want them to then they have the huge increase in expenses without the added value to revenues so that could be a problem.
"The way they are positioning the brand makes sense but we won't know until we look back in a few years if they are able to do it."
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Deal or no deal: Hillshire Brands lists... and is in play