The Battle of the Butcher Case just got more intense, and it’s not nearly over.
Tyson Foods Inc.’s (TSN) salty $50-per-share (or $6.1 billion) offer for Hillshire Brands Inc. (HSH) handily tops the unsolicited $45 ($5.5 billion) offer for the Jimmy Dean sausage maker made my Pilgrim’s Pride Co. (PPC) just two days earlier.
While Tyson’s bid looks superior in most every respect, the market is betting the situation is becoming a heated auction.
Mario Gabelli, founder and chief of GAMCO Investors Inc. (GBL) and a longtime takeover-stock player, exulted, in a series of tweets: “’bidding war’... Better ‘music’ than Beats!... As the arbs say ‘let the bidding war continue!!’...Sausages,hot dogs (protein)...yum. Pilgrim's Pride next at bat!”
Hillshire shares immediately popped above the value of the Tyson offer, trading above $52, which builds in a high likelihood the bidding will continue to escalate. Pilgrim’s Pride has a $6.4 billion in market value, about equal to Hillshire’s and far smaller than Tyson’s $15 billion.
But Pilgrim’s Pride is majority-owned by Brazil’s JBS SA (JBSAY), which controls the old J.B. Swift company and has used $17 billion in acquisitions over the past decade to surpass Tyson as the world’s largest meatpacker. It probably has the resources to compete with Tyson for Hillshire, if it so chooses — though, unlike Tyson, it has not secured solid financing for its offer.
The Pilgrim’s Pride gambit itself had sought to upend a weeks-old friendly deal in which Hillshire was to acquire frozen- and packaged-food producer Pinnacle Foods Inc. (PF).
It’s a bit like the old sight gag of two brothers going for the last serving of meat on a platter, with the second one sticking his fork in the hand of the kid who reached first. This sequence of offers was almost as predictable as that hackneyed dinner-table bit. Some takeover contests come out of nowhere and propose far-fetched strategic alchemy. This one was seen coming from some distance away, based on long-running trends of grocery-store consolidation, a competitive global “protein market” and the need for mature companies in a low-margin business to gain greater scale.
Hillshire Brands is the old Sara Lee packaged-meat and frozen-goods business, having taken the Hillshire name two years ago after hiving off its coffee operations. As with many mid-sized, newly focused companies produced by spinoffs and “de-conglomeration,” it was quickly seen as a potential takeover target, and attracted the sorts of professional investors who seek them.
A long-prepped bid
It’s now rather clear that Tyson and Pilgim’s Pride have been preparing a run at Hillshire for months, and Hillshire’s Pinnacle Foods deal can now be seen as a pre-emptive, defensive maneuver by Hillshire CEO Sean Connolly to preserve independence.
Hillshire shareholders must vote on the Pinnacle deal, which is still governed by a formal merger agreement. But with Hillshire shares up 40% this week based on its status as prey, it’s hard to see it going through. As noted here Monday, Pinnacle – controlled by buyout shop Blackstone Group – will likely end up “in play” down the road, even if it’s cut loose by Hillshire.
The broader trends impelling this consolidation wave been underway for a while – another reason such combinations were largely a matter of “when” rather than “if.” The U.S. grocery business has become dominated by a handful of behemoths, led by Walmart Stores Inc. (WMT) and its Sam’s Club division. According to the USDA, the top four food retailers – Walmart, Kroger Co. (KR), Safeway Inc. (SWY) and privately held Publix – have doubled their share of grocery sales since the late 1990s, to around 40%. They drive harder bargains with their suppliers, which react by adding heft to deliver them and preserve some negotiating power.
The meat processing business, meantime, has globalized, as higher wages in the developing world propel more protein consumption and the industry strains to meet demand. Last year China’s Shuanghui bought American pork producer Smithfield Foods. Tyson expanded from poultry to pork and beef with its IBP takeover early in the last decade. The four largest U.S. beef processors control about 80% of U.S. cattle slaughter. One noted appeal of Hillshire to JBS is the ability to have a big presence in the three big meat categories. JBS already has heavy exposure to poultry and beef, and Hillshire would add pork, leaving the parent company agnostic toward demand shifts among these proteins.
Beef and pork prices have been rising, due to years of drought and, more recently, because of a hog disease. Consumption, not coincidentally, has been ebbing, placing a greater premium on economies of scale.
Another important theme is the branding of “value-added” meat products. Tyson pioneered the branding of what was once a generic product – supermarket chicken parts – in the ‘80s, and since then the companies have sought to escape the trap of being in a pure commodity business. This makes Hillshire, with its Jimmy Dean, Ballpark and Hillshire lines, more valuable.
Reading through to other industry players, it seems this flurry of deal activity is lifting valuations of all meat-related food lines. It’s telling that Tyson shares are up 7% and near an all-time high following its bold grab for Hillshire. It suggests the market spies improved industry economics resulting from more togetherness.
Shares of Sanderson Farms Inc. (SAFM), a smaller chicken producer, are up more than 2% today, apparently on strong earnings reported Thursday but likely also supported by stout valuations applied to industry peers.
It’s also worth watching Leucadia National Corp. (LUK), a low-key mini-conglomerate whose single largest operating business (by revenues) is National Beef, one of the big-four cattle processors.