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Summary

  • Tyson’s winning bid for Hillshire is contingent on the termination of its merger agreement with Pinnacle Foods.
  • Outbid Pilgrim’s Pride is checking out other options: speculation over Pilgrim’s absorption of a smaller chicken producer.
  • Pinnacle would provide the same diversification benefits to Pilgrim’s as Hillshire, but at a lower cost.

As Hillshire Brands (NYSE:HSH) steps away from its Pinnacle Foods Inc. (NYSE:PF) deal following the $7.7 billion takeover bid by Tyson Foods Inc. (NYSE:TSN), the question is: will the outbid Pilgrim's Pride Corp. (NASDAQ:PPC) swoop in for Pinnacle?

Tyson's Triumph

The biggest U.S. chicken producer, Tyson Foods, won the auction for Hillshire Brands at $63/share or $7.7 billion, trumping Pilgrim's offer by $650 million. Pilgrim's declined to increase its bid for a second time, wrapping up at $55 a share.

This doesn't mean Tyson and Hillshire have a deal yet. Three weeks before Tyson and Pilgrim's Pride each made unsolicited offers for Hillshire, the company entered into a merger agreement with Pinnacle Foods for $5.7 billion. The deal with Tyson is contingent on the abandonment of this deal, which has a termination fee of $163 million.

Pilgrim's Pride is looking elsewhere

Shares of Pilgrim's Pride fell nearly 7% to close at $24.51 after news on June 9 that they had dropped out of the bidding. Indicating pressure from the Tyson-Hillshire deal, this further emphasizes PPC's lack of diversity, despite a strong quarterly increase of 81.06% in net income year-on-year.

Pilgrim's Pride is still on the lookout for a deal, and "will continue to pursue more attractive options that add value to our shareholders and strengthen our strategic position in the market," told CEO Bill Lovette to the WSJ.

More chicken?

The WSJ further reports analyst speculation that Pilgrim's could acquire a smaller chicken producer. A candidate could be Sanderson Farms Inc. (NASDAQ:SAFM), with a market value of $2.2 billion - just over a third of PPC's valuation. Other options include Perdue Farms Inc. or Fieldale Farms Corp, both chicken processors, or Bob Evans Farms Inc. (NASDAQ:BOBE), a restaurant and meat products company.

Pilgrim's Pride may decide to take this route and further establish itself as a key player within the chicken industry. However, this would be a different tack to what it was looking to achieve by acquiring Hillshire Brands. The company needs diversity, and while the chicken industry is doing swimmingly (as noted by the company's strong performance in its latest quarterly report) Pilgrim's primary products are already fresh and prepared chicken.

Diversification route

An attractive diversification option comes in the form of Pinnacle Foods. While this company may have been snubbed by Hillshire, its range of product categories would significantly expand Pilgrim's Pride. Its recent annual report shows 44.5% of revenue from its Birds Eye Frozen segment, which includes brands such as Aunt Jemima, Hungry-Man and Lender's, with two product lines holding the number 1 spot in market share, and three at number 2. Its second largest segment is Duncan Hines Grocery, which also impressively pulled in 40.8% of revenue, as well as three product lines at the number 1 spot in market share.

Pilgrim's Pride could benefit from the diversification acquiring Pinnacle would mean. In order to beat Tyson's bid for Hillshire, Pilgrim's Pride would have to offer at least $68/share, or 37 times Hillshire's earnings per share. Alternatively, Pinnacle Foods is trading at a lower cost of 17 times forecast earnings. This would accomplish what Pilgrim's was looking to achieve with Hillshire, but at a fraction of the cost.

Right now, a lot of money is changing hands in the meat industry. It will be interesting to see what move Pilgrim's Pride will make next, if one at all. Pilgrim's interest in Hillshire could indicate an underlying concern for diversification, and therefore, with Hillshire stepping away from Pinnacle, this could spell another great opportunity for Pilgrim's Pride, at a much lower price.

Source: Pinnacle Foods Provides Attractive Alternative To Hillshire Brands For Pilgrim's Pride