Pilgrim’s Pride ups bid for Hillshire Brands

Move over Tyson, Pilgrim’s Pride just upped the bid for Hillshire Brands. It looks like the war for the meat processing company is heating up.

The New York Times story by Michael J. de la Merced had these details about the latest twist in the battle for Hillshire Brands:

Pilgrim’s Pride has raised its takeover bid for Hillshire Brands, people briefed on the matter said Monday, turning up the heat in a battle over the maker of Jimmy Dean sausages and Ball Park hot dogs.

The new offer, worth about $55 a share, tops a $50-a-share offer from Tyson Foods that was unveiled last week. The latest bid is also 22 percent higher than Pilgrim’s Pride’s original unsolicited proposal, which was unveiled last week.

Pilgrim’s Pride’s new bid values Hillshire at about $6.7 billion, while Tyson’s offer was worth about $6.1 billion. Both figures exclude the target company’s debt.

Hillshire was expected to disclose as soon as Monday night that it plans to talk to both of its suitors, some of these people said. That lays the groundwork to halt the food company’s own deal to buy Pinnacle Foods, the maker of Birds Eye frozen vegetables, for $4.3 billion.

Representatives for Pilgrim’s Pride, Hillshire and Tyson declined to comment.

The fight over Hillshire by the two country’s two biggest chicken producers highlights the continued consolidation within the food industry, as companies pursue higher growth. Both Pilgrim’s Pride and Tyson view Hillshire’s well-known brands, which also include Sara Lee desserts and its namesake lunch meats, a way to gain higher-margin products.

Liz Hoffman, Dana Mattioli and Jacob Bunge wrote for the Wall Street Journal that JBS, which owns Pilgrim’s, likes buying companies and making this deal work could be good for them:

JBS, which owns 75% of Pilgrim’s, has a penchant for deal making. The company has used cheap debt and opportunistic timing to scoop up meat-processing properties in North America, helping transform the company into what it claims is the world’s largest meatpacker.

JBS, which started out as a beef producer, bought control of Pilgrim’s in 2009, marking the São Paulo company’s first big move into chicken. Pilgrim’s is now the No. 2 U.S. chicken processor, after Tyson, and securing Hillshire would make the JBS unit the second-biggest competitor in the broader U.S. meat market, with a combined $12 billion in annual revenue.

Both Pilgrim’s and Tyson aim to scuttle Hillshire’s $4.3 billion acquisition of Pinnacle Foods Inc., announced last month. Hillshire struck that deal to diversify its mix of products, adding Vlasic pickles and Duncan Hines cake mix to its portfolio of food brands.

Hillshire’s stock—which had been trading above Tyson’s offer price in anticipation of a higher bid—climbed 2.7% to $55 in after-hours trading after The Wall Street Journal reported the new bid from Pilgrim’s. Tyson shares traded 0.9% lower at $43 a share and Pilgrim’s shares were unchanged at $25.92.

Venessa Wong wrote for Bloomberg Businessweek about the reasons meat companies are looking to combine these days:

1.  Protein is big with consumers now. Tyson and Pilgrim’s Pride have focused on the food service industry and private label. Buying Hillshire would give either company a stable of successful consumer brands. During an earnings call this month, Tyson Chief Executive Officer Donald Smith said, “As long as it’s a strategic fit, whether it’s an international acquisition, poultry, value-added, or prepared foods, those are the areas of our business where we believe our growth potential lies and where we can add the most value to the consumer and the most value to the shareholder.”

2. Commodity meat is a low-margin industry. Purchasing a company with a strong portfolio of prepared food can help producers improve profitability. Acquiring Hillshire, for instance, which makes about three-quarters of its sales in retail, would help boost margins at Pilgrim’s Pride and Tyson, as the companies point out in presentations.

The Associated Press story by Mae Anderson and Candace Choi pointed out that the bids were contingent on Hillshire dropping its acquisition with Pinnacle:

Selling more types of products also would give the companies a buffer from volatile price swings of fresh meat. When beef prices rise and shoppers turn to other meats, the companies can sell more chicken or bacon, for example.

While both Tyson and Pilgrim’s sell some prepared products like frozen fried chicken pieces, their main business has been as suppliers of fresh meat for supermarkets and restaurant chains.

Both offers are contingent on Hillshire abandoning its plan to acquire Pinnacle Foods, which makes Birds Eye frozen vegetables and Wish-Bone salad dressings. Hillshire had been trying to diversify its own portfolio by moving into other areas of the supermarket with the $4.23 billion acquisition.

But some investors questioned whether combining with Pinnacle made sense, given the sharp differences in product categories and the outdated image of some Pinnacle brands, such as Hungry Man frozen dinners.

Hillshire said earlier it strongly believes in its deal with Pinnacle Foods but would review Pilgrim’s offer. In its latest statement on Thursday, the Chicago-based company said it would review Tyson’s offer as well and made no mention of its Pinnacle deal.

What’s clear is that some combination of these companies will happen, but what isn’t so evident is which one makes the most sense for investors. The AP story seemed to cast doubt on the Hillshire and Pinnacle deal as not having much overlap. Investors did like the $55 Pilgrim offer.