Frozen foods maker Pinnacle Foods, Inc. (PF) has finally moved away from its merger agreement with packaged meat producer The Hillshire Brands Co. (HSH). This has cleared the way for Tyson Foods, Inc. (TSN) to go ahead with the acquisition of Hillshire. As a result of the termination of the deal, Hillshire will pay a break-up fee of $163 million to Pinnacle Foods, which the company plans to use in reducing debt.
Chicago-based Hillshire Brands had proposed to buy Pinnacle Foods for about $6.6 billion on May 12, including debt, in order to diversify its portfolio. (Read: Hillshire to Buy Pinnacle Foods for $6.6B). However, two weeks later Tyson and poultry producer Pilgrim’s Pride Corp. (PPC) began a fight to acquire Hillshire,. Pilgrim’s Pride first expressed its interest to buy Hillshire for $45 per share on May 27. 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. However, the deal with Tyson was contingent on the termination of the pending Pinnacle-Hillshire deal.
Later on Jun 16, the board of Hillshire unanimously decided to withdraw its recommendation to acquire Pinnacle. Hillshire’s board resonated 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.
However, per the agreement with Pinnacle, Hillshire could not terminate the deal on the basis of Tyson’s offer. But Pinnacle had the option of terminating the agreement or force the deal to be voted on by Hillshire shareholders. Hillshire Brands had announced to hold its stockholder meeting by August to decide on the deal. However, Pinnacle has terminated the deal much before that.
The announcement comes as a big relief to Tyson Foods, which can now proceed with its takeover of Hillshire.
Tyson has been looking for opportunities to expand its fresh meat business, as the company countered strained beef, pork and poultry supplies. Moreover, an unrelenting drought in California and a second outbreak of a deadly pig virus led to soaring pig prices.
The purchase of Hillshire would make Tyson the industry leader in chicken production and increase its margins in other categories such as desserts and lunch meats to name a few. Tyson will benefit from the strength of Hillshire's products in the breakfast category where the former has little presence. The purchase would also improve Tyson’s economy of scale with more customers and shelf space.
Both Pinnacle Foods and Tyson hold a Zacks Rank #3 (Hold); while Hillshire Brands carries a Zacks Rank #2 (Buy).