Tyson flags 'investor value' as it buys Hillshire

Tyson Foods heralded "year of enhanced shareholder value" as the protein giant revealed it had sealed the purchase of Hillshire Brands, to create a "clear leader" in US prepared foods, with group sales of $40bn.

Tyson Foods and Hillshire Brands, the rump of Sara Lee Corp, said that their directors had unanimously approved the $8.55bn acquisition, which is expected to close on September 27.

The takeover offers a "unique opportunity to transform an important segment of our business", said Donnie Smith, the chief executive at Tyson, which has been attempting to grow in branded foods, and gain extra margins above those at its traditional commodity meat businesses.

"I am confident that together Tyson Foods and Hillshire Brands have the right products and the right people to create years of enhanced shareholder value."

For Hillshire Brands, Sean Connollly, chief executive, said that a "combination with Tyson Foods represents a unique opportunity to provide shareholders with significant and immediate value while also positioning our business for continued success".

"I am confident that we have found an excellent partner in Tyson."

Break fee

Hillshire Brands had in May agreed to an acquisition itself, of Pinnacle Foods, the owner of brands such as Bird's Eye and Aunt Jemima.

That deal smoked out interest in Hillshire Brands from Pilgrim's Pride, the chicken giant owned by Brazil's JBS, which had long had its eye on a tie-up.

A bid by Pilgrim's Pride for Hillshire in turn provoked a rival offer from Tyson Foods, one of JBS's main rivals, opening a bidding war which culminated in the $63-a-share offer agreed on Tuesday.

Tyson Foods will also pay a $163m break fee to Pinnacle Foods, which on Monday agreed to walk away from its own tie-up with Hillshire, after spending $25m on the proposal.

Pinnacle, controlled by private equity giant Blackstone, said that the payout, on which it expects to pay "minimal cash taxes", would be used to reduce debt and promote investment in the company.

Market reaction

Tyson Foods has estimated at $300m a year benefits from the deal through actions such as removing duplicated functions and reaping supply chain efficiencies.

Nonetheless, the deal has received a mixed response from investors, who have sent Tyson Foods shares some 6% lower since it unveiled its first bid, compared with a 4% rise in the average New York-listed share.

Brokers upgrading Tyson Foods shares since the deal include BMO Capital, which raised its rating on the stock to "outperform" from "market perform" while keeping a target price of $43.00.

However Credit Suisse, downgraded the shares to "underperform" from "neutral", cutting the target price from $40 to $35, saying that the shares "will be dead money at best for the next 12 months as [Tyson] copes with the hangover of paying such a big price".

BB&T cut its rating on Tyson Food shares to "hold" from "buy", removing a $44 price target, while Trefis said that "we believe that in the heat of the bidding war, Tyson Foods has overpriced Hillshire Brands.

"Even if the company is able to realise anticipated cost synergies from the deal, it could still find it difficult to justify the steep valuation in the long run."

Tyson Foods shares added 1.3% to $38.35 in early deals on Wednesday, when Hillshire Brands shares nudged 0.2% higher to a fresh record high of $62.75 as another small uncertainty to the deal was removed.

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