Pilgrim’s Pride Raises Offer; Will Tyson Wave the White Flag?

Source: https://www.flickr.com/photos/mommiedaze/

Source: https://www.flickr.com/photos/mommiedaze/

On Tuesday, we learned that Pilgrim’s Pride Corporation (NASDAQ:PPC) made its second takeout offer for Hillshire Brands (NYSE:HSH), and the fourth involving the company in the past month.

The M&A activity started on May 12 when Hillshire made a takeout offer for Pinnacle Foods (NYSE:PF). The company put out a detailed presentation that exhibited the synergies between the two companies. Essentially, it showed how the combined company will be able to cut SG&A costs and increase profit margins. Both companies would also benefit from the reduction of competition in the industry.

This started the ball rolling. In all likelihood, this presentation put ideas into the heads of executives at Pilgrim’s Pride, because last week that company recognized synergies between itself and Hillshire, and this led to a $45/share takeout offer. Like Hillshire Brands, Pilgrim’s Pride put out a presentation that illustrated the synergies between the two companies. The combined companies would eliminate competition in the sector and reduce combined SG&A costs. Pilgrim’s Pride management was so convinced of this that it offered to borrow money in order to buy the company even though the two companies had similar market capitalizations.

However, it didn’t end there. Tyson Foods (NYSE:TSN) came out just two days later and bid $50/share for Hillshire Brands last Thursday. Investors began to realize the potential for value creation in the industry through M&A and they bid up Tyson shares significantly on the news. They also sensed that a bidding war was brewing, and they consequently were willing to pay more than $50/share for Hillshire Brands.

This proved to be correct. Now Pilgrim’s Pride is offering $55/share, or $7.7 billion, which is $1 billion more than the company itself is worth. This time, however, the market reaction was slightly different. On the one hand, investors are still convinced that the bidding war will continue for Hillshire Brands. The stock closed on Tuesday at $58.65/share, which is a 6.6 percent premium to Pilgrim’s Pride’s $55/share bid. However, investors did not bid up Pilgrim’s Pride shares the way they bid up Tyson Foods’ shares on Thursday; Pilgrim’s Pride shares fell by over 2 percent on Tuesday. Tyson Foods shares fell as well — by more than 3 percent.

What this tells me is that the market doesn’t think that the bidding war is over, but that it probably should be. The premium being offered by Pilgrim’s Pride for Hillshire Brands no longer seems justifiable, and therefore investors are selling the stock.

What should investors do in response to this? First and foremost, it doesn’t seem wise to continue holding onto Hillshire Brands. If you were fortunate enough to be a shareholder before the bidding war began you have done incredibly well. Now is not the time to be greedy.

Second, the market was not so impressed with Pilgrim’s Pride for continuing the bidding war, and one has to wonder whether its actions are justifiable at this point. With that being said, the stock is inexpensive, and it doesn’t make sense to sell it at 11 times earnings. However, until the bidding war is over, it is probably a good idea to stay away, as with any merger there is usually a lot of uncertainty, and the projected synergies don’t necessarily work out immediately.

Two companies that investors might want to consider are Tyson Foods, which trades at a reasonable 15-times earnings, and Pinnacle Foods, which has been left in the dust. The latter company in particular looks expensive at 36-times earnings, but it is in the later innings of a turnaround, and we should expect margins to rise in the upcoming quarters as costs come down. Furthermore, its takeout premium has dissipated as Hillshire Brands will be acquired rather than be an acquirer. But at the same time, Pinnacle Foods is a potential takeover target, and Tyson Foods might be the suitor. That merger would likely benefit both companies.

Disclosure: Ben Kramer-Miller has no position in Hillshire Brands or in any of the stocks mentioned in this article.

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