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Hillshire Hits 52-Week High as it Moves to End Pinnacle Deal

Zacks Equity Research

Shares of meat producer The Hillshire Brands Company (HSH) reached a 52-week high of $62.19 on Jun 17 and eventually closed at $62.00 after the company’s board expressed its intention to go ahead with the deal offered by Tyson Foods, Inc. (TSN) and end the pending deal with Pinnacle Foods, Inc. (PF).

Hillshire shares have been gaining momentum ever since Tyson Foods and poultry producer Pilgrim’s Pride Corp. (PPC) engaged in a bidding war to acquire it. It all started on May 27, when Pilgrim’s Pride first expressed its interest to buy Hillshire for $45 per share. Soon, on May 29, Tyson made a rival bid of $50 per share for Hillshire. The proceedings took an interesting turn when, on Jun 3, Pilgrim’s Pride raised its offer to $55 per share. But Tyson finally clinched the deal with its offer of $63 per share made on Jun 9. Shares of Hillshire have increased 37.7% since May 27. However, the Tyson deal cannot move further as long as the Hillshire-Pinnacle deal remains in place. Hillshire proposed to buy Pinnacle Foods for about $6.6 billion on May 12, including debt, in order to diversify its portfolio.

On Jun 16, the board of Hillshire unanimously decided to withdraw its recommendation to acquire frozen foods maker Pinnacle Foods. Hillshire’s board stated that it considered Tyson’s $63 per share or more than $7.7 billion offer superior to Hillshire’s proposed acquisition of Pinnacle Foods for $6.6 billion and therefore more favorable for its shareholders.

Hillshire’s board has already provided a written notice to the board of Pinnacle Foods stating its intention to withdraw its recommendation. However, Pinnacle, on its part, did not propose any changes to the deal to make the merger more lucrative than Tyson’s offer.

Per the agreement with Pinnacle, Hillshire cannot terminate the Pinnacle deal on the basis of Tyson’s offer. But Pinnacle may terminate the agreement or it can force the deal to be voted on by Hillshire shareholders. If Pinnacle terminates the merger agreement prior to a vote of Hillshire Brands stockholders, it will be entitled to receive a termination fee of $163 million from the latter. If Hillshire Brands goes through the voting process and rejects the Pinnacle deal, then it can terminate the merger agreement. In this case, Pinnacle Foods may be entitled to receive a break-up fee of $43 million and an additional $120 million under certain circumstances. Notably, both the merger agreements will automatically terminate after the expiry of the offers on Dec 12, 2014.

Hillshire Brands expects to hold its stockholder meeting by August to decide on the deal. Hillshire carries a Zacks Rank #2 (Buy), while Tyson holds a Zacks Rank #3 (Hold). 

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