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Why Hillshire Brands is Up to Strong Buy?

Zacks Equity Research

Zacks Investment Research upgraded The Hillshire Brands Co. (HSH) to a Zacks Rank #1 (Strong Buy) on Jun 24, after the company’s board expressed its intention to go ahead with the deal offered by Tyson Foods, Inc. (TSN) and recommended to end the pending deal with Pinnacle Foods, Inc. (PF) on Jun 16.

Hillshire has been in the limelight 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. However, the Tyson deal cannot move further as long as the Hillshire-Pinnacle deal remains in place. Hillshire had proposed to buy frozen foods maker Pinnacle Foods for about $6.6 billion on May 12, including debt, in order to diversify its portfolio.

Why the Upgrade?

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.

Hillshire’s board had earlier 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. Notably, both Tyson’s and Pinnacle’s merger agreements with Hillshire will automatically terminate after the expiry of the offers on Dec 12, 2014. Now, Hillshire Brands expects to hold its stockholder meeting by August to decide on the deal.

We expect Hillshire’s board to vote for the Tyson deal at the meeting and terminate the Pinnacle deal as Tyson’s offer is more favorable for its shareholders. Moreover, it will provide a substantial premium and immediate cash benefit to Hillshire shareholders.

This meat company witnessed sharp upward estimate revisions since the bidding war started. Estimates for fiscal 2014 increased 1.2% over the past 30 days, while estimates for fiscal 2015 grew 0.5% over the same time frame.

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