Pilgrim's Pride unveils $6.4bn bid for Hillshire

Pilgrim's Pride unveiled a $6.39bn, unsolicited, bid for Hillshire Brands in an attempt to create a "leading branded" meat group, and fulfil a long-held desire to acquire the sausages-to-desserts group, the rump of Sara Lee Corporation.

Pilgrim's Pride - one of the top US chicken producers, bought from bankruptcy by Brazil's JBS four years ago – said it had offered $45.00 a share in cash for Hillshire Brands, the owner of labels such as Jimmy Dean, Wing Dings and State Fair.

The deal, which Pilgrim's Pride said would create a "branded protein leader", with combined sales of $12.4bn, follows a meeting between the two groups in February in Chicago, where Hillshire is based.

"As you are well aware, it has long been our desire to acquire the company," Pilgrim's Pride chief executive and JBS chief executive Wesley Batista said in a joint letter to Sean Connolly, their counterpart at Hillshire.

However, the offer, to which Hillshire has yet to make a response, would require the Illinois-based group ditching its own takeover, of packaged foods group Pinnacle Foods, which was floated last year in New York by private equity firm Blackstone Group.

'Substantial premium'

Pilgrim's Pride said that its $6.39bn offer - which includes a $163m break fee for the Pinnacle Foods deal, besides net debt of $553m – represented a "substantially superior alternative" to Hillshire's own acquisition plan.

"For Hillshire shareholders, our proposal provides a substantial premium, greater certainty and immediate cash value for their shares," Mr Lovette said.

The offer values Hillshire at 12.5 its trailing earnings before interest, tax, depreciation and amortisation (ebitda), on Pilgrim's Pride calculations, and represents a 22% premium to the level the shares closed at on Friday.

"We are coming forward now because the opportunity for your shareholders to obtain the compelling value represented by our proposal will no longer exist if the proposed acquisition of Pinnacle is consummated," he added.

'Value to shareholders'

JBS said that the proposed acquisition of Hillshire – formed from the rump of Sara Lee Corp after the spin-off of coffee and tea operations in 2012 - was aligned with the Sao Paulo-based group's aim "to expand its presence" in the branded meats sector.

"This proposed acquisition increases the presence of JBS into an expanded margin category, thus bringing value to its shareholders."

JBS, which also runs its own beef and pork operations in the US, besides owning 68% of Pilgrim's Pride, has a strategy, like many rival such as Hormel Foods and Tyson, of backing branded meats, which offer higher margins than commodity product.

The group has supported its growth largely through takeovers, including the R$5.85bn ($2.6bn) purchase last year from Brazilian rival Marfrig Global Foods of the Seara food processing assets.

Indeed, JBS's growth from an abattoir in western Brazil in the early 1950s has been fuelled by deals, a strategy which forced the group to turn to shareholders for extra capital in 2010 as the global financial crisis forced it onto the back foot.

Debt implications

Pilgrim's Pride - which was itself forced in bankruptcy in 2008 by the impact of rising feed prices at a time when its debts remained swollen by the $1.1bn purchase of Atlanta-based Gold Kist in 2007 – acknowledged that its borrowings would rise to the equivalent of 4.2 times ebitda.

That is well above the group's goal of pinning net debt below 2.5 times ebitda.

However, this was "well below the levels" that Hillshire itself had prepared for on buying Pinnacle Foods.

And Pilgrim's Pride said that its gearing would fall to 3.5 times ebitda as of the end of next year.

Mr Batista two weeks ago said that JBS was "analysing all the possibilities that we can do to be better structured in terms of our tax structure" given the diminished debts at Pilgrim's Pride.

"Pilgrim's is generating a lot of cash and we are going to be debt free… very soon, probably by the end of the second quarter," he told investors.

Market reaction

In New York, Hillshire Brands shares soared to an all-time high of $45.07 before easing to stand at $44.96 after half an hour's trading, up 21% on the day.

Pilgrim's Pride shares were 3.9% higher at $26.09.

In Sao Paulo, JBS shares eased 0.1% to R$7.88.

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