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Tyson wins round one of battle for Hillshire Brands

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Tyson Foods boss Donnie Smith has won round one in the battle for Hillshire Brands.

Chicken group Pilgrim's Pride showed daring in bidding on Tuesday for the company behind Jimmy Dean sausages and Ball Park hot dogs while it was destabilised by its own plans for an acquisition.

Hillshire's proposal to buy Pinnacle Foods, the company behind Aunt Jemima pancake mix, had hardly set the markets alight.

But Tyson's offer is less of a risk. Indeed, the group has positioned itself to come away with something, whether it wins or loses the bid battle.

Education in margins

If its offer succeeds, Tyson Foods establishes itself properly in the packaged foods industry which it has long been attempting to beef up in, but with mixed success.

Only 9% of the group's revenues come from the sector, and the share of profits even lower, at 5%, meaning margins are lower than the Tyson average – exactly the opposite of what is meant to happen.

The point of going into packaged foods is to capture the margin gained by turning commodity protein into branded sausages, hot dogs and so on.

If Mr Smith could turn Hillshire's expertise to its advantage, the takeover would prove a goldmine. Hillshire's operating profit margins are more than four times those of Tyson itself.

Only the first round

Still, a Tyson victory is by no means a certainty.

The jump in Hillshire shares to a close at $52.76 on Thursday, above the Tyson offer of $50.00, signals that investors believe this bidding war is not over yet.

But even if Pilgrim's Pride hikes its bid, currently at $45 a bushel, and Tyson loses out in Hillshire, it will walk away with a valuable consolation prize, in forcing its rival, controlled by Brazil-based JBS, to pay up.

Tyson has spent a decade watching JBS, backed by BNDES, Brazil's development bank, brave large leverage levels to fund an acquisition spree which has taken it top rank in world meatpackers – overtaking Tyson itself.

Every dollar extra on the price of a Hillshire acquisition reduces the resources the JBS empire will have available for its next deal.

The borrowers

Indeed, JBS has already risked angering its bond investors by backing the bid for Hillshire.

The Brazilian group, whose debt burden got it into a tough spot some five years ago, had been talking of reducing its borrowings, built up again after the R$5.85bn purchase last year of domestic poultry and pork plants from rival Marfrig.

OK, Tuesday's intial bid for Hillshire didn't alarm ratings agency much.

But that might change with a sweetened bid, which would push JBS's gearing, as measured by the ratio of net debt to earnings before interest, tax, depreciation and amortisation (ebitda), well beyond the 4.1 times reached after last year's purchase from Marfrig.

Round two looming?

Of course, it is possible that neither Pilgrim's Pride nor Tyson Foods will ensnare Hillshire.

A further suitor could yet emerge, with even deeper pockets. Besides, Hillshire has yet to abandon its plans to buy Pinnacle Foods, a deal which both Pilgrim's and Tyson had demanded must be ditched.

But as it stands, Tyson Foods' Mr Smith looks likely to walk away with more carefree steps than the JBS-Pilgrim's Pride leaders Wesley Batista and Bill Lovette.

Still, JBS is no novice when it comes to deals. Mr Smith shouldn't let his initial victory go to his head.

By Mike Verdin

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