All eyes on M&A at Tyson

All eyes on M&A at Tyson

Tyson Foods has seen sales and earnings growth lifted by consumer demand for proteins. The company has emphasised its strategy to grow organically, with a particular focus on prepared foods. However, Tyson also hopes to raise its growth trajectory through M&A - and here the group is coming up against some stiff competition. Katy Askew reports.

US meat group Tyson Foods has benefited from the switch many US consumers are making from carbohydrate- to protein-based foods.

According to Mintel, a research firm, high-protein products are among the "most sought after nutritional choices" among US consumers. This has resulted in an uplift in NPD with an increasing number of products touting "high protein" credentials.

While the protein craze spans various categories, from snacks to meal replacements, the demand for protein has also boosted meat sales value, Tyson CEO Donnie Smith said yesterday (5 May).

Speaking during a conference call with analysts, Smith said: "Increasing protein prices have indicated continued strong demand for protein often as the expense of carbohydrates. We're seeing a noticeable ship among the proteins as well. Looking at Nielsen 52-week data, pounds of fresh meats sold at retail were up a little over a percent, or nearly 3% higher prices."

According to Smith's assessment, consumer demand continues to be shaped by an hour-glass effect that has seen growth at the high and low ends of the US meat sector at the expense of mid-market products.

This "bifurcation" of consumers works to Tyson's benefit because the firm "is serving all of these consumers and whatever channel, price points or type products they are looking for", Smith said. "That is one of the reasons we continue to be successful."

The company booked a second-quarter increase in sales of 7.8% and Smith stressed that the expansion of value-added products remained "key".

In prepared foods, Tyson drove organic growth by investing in marketing and advertising. The group also completed "several" new product launches in the quarter, such as the group's breakfast line Day Starts.

"The initial rollout went better than planned and we're exceeding all our pre-launch objectives. These products had an ACV of 60% by mid-March, which is the fastest growing ACV of any product launch in our industry," Smith revealed.

The company has invested in operational improvements in the lunchmeat side of its business, management revealed.

"We have some strong businesses in that [processed food] portfolio that are doing very well, and we've got some others that are a bit more immature that we're investing heavily... I really think looking forward, what you should expect we pay for that prepared foods segment to be in its range next year, as we see these investments come to provision in these next two quarters."

While Tyson is investing in driving organic growth at its prepared foods business, the group is also on the look out for acquisition opportunities.

CFO Dennis Leatherby outlined the group's spending priorities. "Our priorities for excess cash remain the same, which are capital spending to improve and grow our existing businesses, acquisitions, either small bolt-ons or larger strategic acquisitions to fulfil our growth strategies around value-added products and international and returning cash to shareholders through share repurchases and dividends."

As part of the M&A drive, Tyson has restructured its business with a dedicated team under Hal Carper focusing on strategic initiatives and M&A opportunities.

Management maintained that the M&A environment is currently "very attractive" and revealed that the company is currently pursuing a "variety of opportunities" in value-added processed foods in the US or internationally.

The company was recently rumoured to be in the running to acquire US egg group Michael Foods, which was sold last month to Post Holdings for $2.45bn

However, as KeyBanc Capital Markets analyst Akshay Jagdale noted, competition in the M&A space has resulted in a rise in valuations. This, he suggested, could make it harder for Tyson to identify targets that would meet the group's target of 20% return on invested capital.

"Obviously the M&A environment is very good right now. But the type of prices being paid I would argue are also pretty rich, especially let's say for Michael Foods to get a 20% ROIC pre-tax would imply I think doubling the EBITDA on that business in five years," he observed.

Leatherby said that the competitive nature of the M&A landscape meant Tyson has to "work that much harder" to hit its target for returns. This, he stressed, could be achieved through synergies and the expansion of the target business within Tyson's existing distribution framework.

"Our goal is to achieve a 20% ROIC with an acquisition. To the extent that the M&A environment requires higher prices to be paid for companies, that means we have to work that much harder to get there and we can," he stressed.

However, the executive conceded that it might take longer than Tyson would like to achieve its targeted results. "That might mean we have to push it out for three to five years to get that return. But we think ultimately, those kind of acquisitions still would be very accretive from an EPS and then ROIC standpoint over time."

According to BB&T Capital markets analyst Brett Hundley, this outlook prompted some investors to get "antsy as it relates to M&A". This, he suggested, was a factor in the group's "overdone" share price drop - which saw stock fall by almost 10% at close of play yesterday.

In a note to investors, Hundley stressed that the company's operational performance - as well as the expectation that it will participate in sector consolidation - place it in good stead. "It is Tyson's ability to execute, along with expectations that it can integrate value-added, accretive M&A, that has led to the company's valuation improving over time," he wrote.

Certainly, Tyson is focused on expanding through "disciplined" M&A as well as organic growth.

As the firm's chief executive commented: "We feel great about our organic opportunities, we feel great about our opportunity to invest in our current business, but we're also going to be out there looking for strategic opportunities to fill in the gaps where we need to, or to create a little bit more aggressive head space in a category where we maybe able to buy, as long as the purchase make sense, and then accelerate growth in that particular category."