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Takeover in aisle four: The battle for Hillshire

May 29, 2014, 6:01 PM UTC

The escalating takeover battle for Hillshire Brands Co. (HSH), known for its iconic Jimmy Dean and Hillshire Farms brands, centers around two protein producers looking to sell more name-brand meats in America’s supermarkets and other national chains.

Tyson Foods Inc. (TSN) and Pilgrim’s Pride Corp. (PPC) this week have each unveiled competing bids to acquire the packaged-foods company, both aiming to scoop up a company that generates about $4 billion in annual sales that are heavily tilted toward higher margin branded products sold almost entirely in the U.S.

Tyson on Thursday unveiled a roughly $6.13 billion bid to buy Hillshire, which topped Pilgrim’s offer valued at about $5.5 billion. Pilgrim’s bid has the backing of its majority owner, Brazilian meatpacker JBS SA.

“It is smarter [for Tyson] to go out and buy a packaged food company rather than watch a Brazilian-based rival make yet another move in their home market,” said Canaccord Genuity senior credit analyst Tom O’Neill. O’Neill says that while Tyson has deeper pockets and less leverage to better position them to acquire Hillshire, JBS has had an aggressive growth strategy in recent years.

“My sense is Tyson will win,” O’Neill said.

If either bid were successful, they would sideline Hillshire’s own $6.6 billion deal, including debt, to buy Pinnacle Foods Inc. (PF), an offer that was unveiled in earlier in May.

Investors appear to favor a takeover of Hillshire rather than a Pinnacle acquisition. In the days following Hillshire’s bid for Pinnacle, the company’s stock barely budged. But shares have leapt since Hillshire became a takeover target, with the stock trading above $52 on Thursday. That price is above Tyson’s $50-a-share offer and suggests some investors are counting on a higher price.

Tyson and Pilgrim’s are both large meats producers that generate a sizable portion of their sales from food service operators, which include restaurants, distributors, wholesale clubs and schools.

The food service segment makes up roughly 50% of Pilgrim’s Pride’s U.S. sales and 34% of Tyson’s total sales. But that segment only contributed 26% of Hillshire’s total sales for the latest fiscal year.

Instead, Hillshire generates a bulk of its sales from the retail sales of packaged meats and frozen bakery products to retail customers in supermarkets, warehouse clubs and national chains. Almost all of the company’s retail sales are generated in the U.S.

O’Neill said both Tyson and Pilgrim’s would benefit from becoming fully integrated meats companies, saying the acquisition would result in steadier cash flow generation. An acquisition would also give both companies an opportunity to expand in markets abroad, where Hillshire has little presence.

“The brands have a lot of value as this industry becomes more global and some nations have had food-safety issues,” O’Neill said. “Getting high quality American brands in front of an international audience, in particular emerging markets, makes sense.”

Hillshire, previously known as Sara Lee Corp., in recent years spun off its coffee and tea businesses and sold off a handful of assets including its North American refrigerated dough segment and international household and body care businesses. The company that remained, Hillshire as it is known today, became a pure-play meat company that analysts saw as a potential takeover target.

Tyson and Pilgrim’s executives both argued their companies would benefit from adding Hillshire to their portfolio, pointing to Hillshire’s higher margin products. Both companies tout similar synergies that focus on sales and marketing and supply chain consolidation.