A Bidding War for Hillshire Brands

Earlier this month Hillshire Brands offered a bid at $4.3 billion for Pinnacle Foods in a cash-and-stock deal. Many analysts thought it was a surprisingly good fit. The Hillshire Brands portfolio includes Ballpark Franks, Jimmy Dean, and Sara Lee. On the other hand, the Pinnacle Foods portfolio includes Vlasic pickles, Duncan Hines cake mix, and Birds Eye frozen vegetables. Really, it wasn’t too hard to image a Ballpark Frank merging with a Vlasic pickle. Blackstone Group, which holds about 51% of Pinnacle’s outstanding common stock, agreed to vote in favor of the deal, as it would allow them to sell their stake. However, this offer initiated a bidding war among other competitors in the food industry – an industry which hopes to grow while margins are high.

Only a few months ago, Pilgrim’s Pride approached Hillshire about a potential merger but was abruptly rejected. Pilgrim’s Pride is a subsidiary of Brazilian food giant, JBS, and they are a well-known poultry producer in the U.S. This past year they generated $8.4 billion in sales. In light of the Pinnacle offer, this past Tuesday Pilgrim’s Pride offered a $6.4 billion bid for Hillshire, including the assumption of debt. Rather than mixing Ballpark Franks with Birds Eye vegetables, some argue that it makes more sense to combine the two meat producers. As part of the bid, the chief executive of Pilgrim’s Pride, Bill Lovette, publicly wrote to CEO Sean Connolly of Hillshire Brands saying, “We are coming forward now because the opportunity for your shareholders to obtain the compelling value represented by our proposal will no longer exist if the proposed acquisition of Pinnacle is consummated.” After being rejected once already Mr. Lovette hopes to cease Hillshire’s attention while multiple bids are on the table.

Another bid to mention is one from Tyson Foods, the giant poultry, pork, and beef producer that trumps everyone else with over $34 billion in revenues this past year. Tyson has come to the table with a $6.8 billion buyout bid for Hillshire. Just as Pilgrim’s stance, Tyson requires an end to the Pinnacle merger for their transaction to be carried out. Hillshire must consider whether to pursue or to be pursued.

Farha Aslam, an analyst for Stephens Inc., said that “Both Tyson and Pilgrim’s are enjoying very good profitability today, but Hillshire would help secure future earnings growth for both companies, because at some point, the chicken cycle will turn […] Whoever gets Hillshire will be a more formidable player in the marketplace.”

One reason for this is explained by Jacob Bunge and Dana Mattioli of the Wall Street Journal. They say that

Hillshire’s annual sales of $4 billion are far smaller than those of Pilgrim’s and Tyson, but its business overall is more profitable. Hillshire’s operating profit margin last year was 9.3%, versus 7.8% for Pilgrim’s and 4.7% for Tyson, according to the companies.

Combine that with the power of a few very well-known brands and it makes sense why Hillshire is being pursued so heavily. So far this week Hillshire’s stock price continues to rise, indicating that investors anticipate a potentially higher bid to emerge.

Andrew Dunnington
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