Shares of packaged meat producer The Hillshire Brands Company (HSH) reached 52-week high of $45.52 on May 27 after Pilgrim’s Pride Corp. (PPC) proposed to buy Hillshire Brands in an all-cash deal. Shares of Hillshire Brands soared 22% on the news and eventually closed at $45.19.
Acquisition Proposal
On May 27, this chicken processor Pilgrim’s Pride made an unsolicited bid to acquire Hillshire Brands for approximately $6.4 billion. The deal follows the latter’s pending acquisition of Pinnacle Foods, Inc (PF) announced on May 12.
Per the deal, Pilgrim’s Pride will offer $45 per share in cash for all of the outstanding shares of Hillshire. The transaction values Hillshire at 12.5x its trailing twelve-month adjusted EBITDA as of Mar 29, 2014, including the $163 million termination fee payable to Pinnacle Foods. Pilgrim’s Pride is expected to finance the deal using a combination of available cash and debt. The deal is expected to close in the third quarter of 2014, after Hillshire terminates its deal with Pinnacle Foods.
The deal is a strategic fit to both the companies and their combination is expected to create a strong meat company with complementary brands providing consistent earnings. Pilgrim’s Pride will benefit from Hillshire’s strong innovation program and marketing abilities, which will complement its operational efficiency. Both the companies have solid brands and customer base. Moreover, the combined companies will be able to meet the growing demand of meat products.
Pilgrim’s Pride expects its offer to be a better alternative to Hillshire’s pending acquisition of Pinnacle, as this proposal provides a substantial premium and immediate cash value to Hillshire shareholders. On the other hand, as part of the Pinnacle deal, Pinnacle Foods shareholders will get $18.00 in cash and 0.50 shares of Hillshire Brands common stock for each share. Hillshire Brands plans to fund the transaction with $2.1 billion of equity and $4.8 billion of debt. The company expects to maintain its annual dividend of 70 cents a share but will suspend its share repurchase program to focus on debt pay-down. This deal would expand Hillshire Brands’ product offering and bolster its presence across the frozen, refrigerated and dry grocery categories.
Chicago-based Hillshire stated that it will review Pilgrim’s Pride’s proposal but added that it still believes in its plan to buy Pinnacle Foods, a Zacks Rank #2 (Buy) company.
Hillshire Brands holds a Zacks Rank #3 (Hold), while Pilgrim’s Pride holds a Zacks Rank #1 (Strong Buy). Investors can also consider another meat company Sanderson Farms Inc. (SAFM) with a Zacks Rank #1.
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