Tyson Foods Inc. won the bidding battle for Chicago-based Hillshire Brands Co., agreeing to pay $7.8 billion in a deal that it believes will bolster its efforts in the rapidly growing breakfast segment.
The richer-than-expected premium for Hillshire, at $63 a share in cash, is more than justified by growth opportunities in breakfast, portable and prepared foods sold under the Hillshire Farm and Jimmy Dean brands, in addition to expected cost savings from combining the two companies, Tyson CEO Donnie Smith said Monday.
“Do we think we paid full and fair value? Yeah,” Smith said. “Do we think this will create significant shareholder value over time? You bet. … They’re a super add to our business.”
The offer, finalized Sunday evening, surpassed a bid from rival Pilgrim’s Pride Corp. by almost $1 billion. In a statement Monday, Pilgrim’s said it wouldn’t go beyond an already sweetened offer of $55 a share and was withdrawing its offer.
But it’s not certain that Tyson’s deal will close. Tyson’s offer for Hillshire expires Dec. 12. And it is contingent on Hillshire dropping earlier-announced plans to buy Birds Eye frozen vegetable seller Pinnacle Foods Inc. in a $6.6 billion deal, including debt.
On Monday, Hillshire said it had not approved the Tyson offer and had not changed its recommendation that shareholders vote for the Pinnacle deal.
“There can be no assurance that any transaction will result from the Tyson Foods offer,” Hillshire said.
Analysts had warned that a bidding war could result in the winner overpaying for Hillshire. They also said such a merger could give the winner a competitive advantage that would be hard for the loser to match.
To that end, shares in Tyson and Pilgrim’s closed down 6.5 percent (at $37.50) and 6.7 percent (at $24.51), respectively. Hillshire Foods closed at $62.06, up 5.3 percent.
Athlos Research principal Jonathan Feeney said Tyson overpaid “in a conventional sense.” But, he said, Tyson can afford it because of what Hillshire brings to the table with its popular grocery brands.
One consumer advocate said the everyday grocery shopper might stand to lose.
Christopher Leonard, author of the recently released book “The Meat Racket: The Secret Takeover of America’s Food Business,” said the merger would give consumers fewer choices at the grocery store.
“This makes the business even less competitive and more consolidated than it already was,” Leonard said. “What we’ve seen over the past couple decades is, a handful of companies like Tyson have gone on a massive merger spree … and that means that consumers can’t use one of the most powerful things they have, which is choice, in the market. You can’t effectively choose.”
Springdale, Ark.-based Tyson said its new offer, up from its initial bid of $50 per share and unanimously approved by its board, is valued at about $8.55 billion, including Hillshire’s debt.
The deal is subject to Hillshire being released from its plan to buy Pinnacle Foods, which carries a $163 million breakup fee.
In a conference call Monday, Smith said he anticipates cost savings of $300 million-plus during the first three years if the deal is completed, primarily from operational and supply chain efficiencies.
Smith said Tyson scouted Hillshire for “a long time,” and that the company was determined to be the best strategic fit because it has “the right brands and the right culture.”
Breakfast food is a growing part of the packaged food business, and one in which Hillshire has been expanding. Tyson is eager to nab Hillshire products such as Jimmy Dean Delights breakfast sandwiches and sausages, which are the No. 1 brands in their categories. Protein in particular is the fastest-growing option for prepared breakfast foods, Tyson said. This year, Tyson introduced its first line of frozen breakfast sandwiches, called Tyson Day Starts.
Hillshire has been seen as a potential acquisition candidate for months as companies look for ways to boost their sales of branded foods, which often carry higher profit margins than commodity-focused items.
A Hillshire acquisition would be Tyson’s largest deal, surpassing its 2001 acquisition of beef producer IBP Inc., according to Bloomberg data.
Tyson has completed several smaller acquisitions over the past several months, including its January purchase of the assets of Michigan-based Bosco’s Pizza Co., a maker of stuffed breadsticks and frozen pizzas.
As part of its offer for Hillshire, Tyson agreed to keep a presence in Chicago.
“We cast a wide net and looked at a number of significant opportunities,” Smith said. “The team that kept coming out on top was Hillshire.”