Tyson Foods has won through in the bidding war to acquire Hillshire Brands with an improved US$63 per share offer for the for the Jimmy Dean maker. But, at 16.7x EBITDA, is the lofty price of US$8.55bn overly inflated? Katy Askew investigates.
Tyson Foods announced yesterday (9 June) that weekend negotiations with Hillshire Brands saw it emerge as the highest bidder for the US meat group, with an offer price above rival Pilgrim’s Pride.
The highly publicised tit-for-tat takeover battle saw Pilgrim’s Pride end Friday ahead by a nose with a US$55 per share bid for Hillshire – an offer that prompted Hillshire management under CEO Sean Connolly to open negotiations with the two would-be acquirers.
Tyson’s latest bid values Hillshire at US$8.55bn – a staggering 16.7x EBITDA. Hillshire must withdraw from its agreement to acquire Pinnacle Foods before its board can endorse the agreement and the offer can be put to shareholders and Tyson has said it will keep its offer open until December.
Withdrawing its own takeover proposal, Pilgrim’s Pride said its “disciplined approach” to M&A and focus on securing adequate returns for shareholders precluded it from raising the bar higher still. “As a disciplined acquirer, we determined that it was in the best interests of our shareholders not to increase our proposed price of US$55 per share in cash,” said Bill Lovette, Pilgrim’s CEO.
Indeed, at Tyson’s initial US$50 a share bid, management conceded it would take three-to-five years for the company to reach its targeted 20% ROIC. Given the much higher final price tag, there is some concern that the positive impact of the acquisition will take time to feed through to Tyson’s bottom line.
The high price could also have implications for Tyson’s investment rating should it choose to fund the deal through debt and pundits have suggested that the group is likely to issue stock to fund the deal.
BB&T Capital Markets analyst Brett Hundley wrote in a note to investors: “We expect Tyson shares to be pressured over the short term. The price tag is large, ROI metrics are limited, and an equity offering is likely, in our opinion.”
Speaking to just-food during a media call, Tyson CEO Donnie Smith was upbeat on the impact the deal would have on profitability and insisted that the company remains committed to its target of 20% ROIC.
“As we have gone back through all of our models and spent a little bit more time on the synergies, we think we would be approximating the 20% area in year five. And by the way, still opportunities in that five year period to get there. We are not giving up on our target, we think that is an important target for our business and how we can drive value for the shareholders,” he commented.
Smith also suggested that the deal leaves Tyson better positioned to increase returns and drive shareholder value in the longer term. “I would hasten on to add with a transaction of this size and the agility that it gives us, there are more opportunities to create value. We think we have a better opportunity to get beyond the 20% area over time than we would have without a transaction of this nature. This is important to us and we are committed to getting to that 20% area.”
The strategic rationale that firmed Tyson’s resolve is clear. The deal will see a step-change at Tyson’s prepared foods business – one of its three strategic growth drivers – raising its contribution to group sales from 9% today to 18%. The combined business would see prepared foods contribute 20% of operating profit, compared to the current 5%.
The deal will significantly increase Tyson’s reach in retail channels, would shift Tyson’s prepared foods business towards branded sales and fill in some of the blanks in the group’s prepared foods portfolio. The combined entity will leapfrog ConAgra to become the second largest player in the US frozen category behind Nestle. Significantly it will increase Tyson’s exposure to frozen breakfast and snacking products – the growth spots in a category in overall decline – Smith told just-food.
“Frozen is still an important category. But when you look at the category as a whole you have to look at the parts that are growing. What is growing in frozen? Well, breakfast and hand-held. And where does Jimmy Dean play a very important role? Hand-held and breakfast,” Smith stressed.
“If you take the parts that are growing and are meaningful to consumers it is important to be there. And certainly it is an advantage to be the number one player in a growing [part of] the category. If you look at the category growth in the last couple of years for frozen chicken and you look at the category growth in breakfast, there is a huge opportunity for us to create value for our shareholders and, by the way, consumers in the frozen category.”
Smith said he expects to drive growth across Hillshire’s portfolio of brands – and this anticipation is reflected in the group’s valuation. “We looked at the growth potential for the long-term in the critical categories – for example… around the combination of frozen breakfast and chicken… does that give us the opportunity to create shareholder value? We made an acquisition that gives us the opportunity to create significant shareholder value over the long-term,” he suggested.
The company also confirmed that it expects to generate $300m in synergies over three years, with around $100m to be accomplished in the first year.
“This includes efficiencies in areas like operations, purchasing, transportation as well as the value of upgrading raw materials. It will also save us the cost of brand building in areas where Hillshire is the number one or number two in the category,” Smith revealed.
With the number of transformational M&A targets in the US protein space few and far between to say the least, the complementary nature of Hillshire meant Tyson management was prepared to pay a high price to seal the deal.