Tyson Offers to Buy Hudson Foods 3 Weeks After Massive Recall

Only 23 days after being forced by the federal government into a historic recall of contaminated beef, Hudson Foods Inc. decided to give up the fight and sell to its neighbor, Tyson Foods Inc.

Springdale-based Tyson will pay $8.40 in cash for each share of Hudson stock plus 0.6 share of Tyson stock. The deal will reap the Hudson family — Chairman James T. "Red" Hudson and children Michael T. Hudson, James R. Hudson and Jane Helmich — about $236 million, including 6.7 million shares of Tyson stock.

"The decision to sell was not an easy one, or one that was made precipitously," says Red Hudson, who founded the Rogers company 25 years ago when he bought a division of Ralston Purina Co. "Tyson Foods has been our neighbor and friend for 25 years now. They have made us a very good offer, and the Hudson Foods board and I have decided that it is in the best interest of our shareholders, associates, growers and customers to accept."

Although Hudson Foods has often had suitors in the past, the decision to sell now was almost certainly in response to the bad publicity it received last month when the U.S. Department of Agriculture forced it to recall 25 million pounds of beef, the largest meat recall in history. The recall was precipitated when 16 people in Colorado became ill from E. coli bacteria contamination found in some of Hudson's beef.

One source in northwest Arkansas, who asked not to be identified, says that may have been more than Red Hudson wanted to continue to endure.

"There was a tremendous amount of brand harm done to the Hudson name as a result of the USDA's power grab and [Agriculture Secretary Dan] Glickman's personal vendetta for power," the source says. "I think Red Hudson said to himself, 'We'll recover from this. The hamburger [business] was only 6 percent [of annual sales]. However, my good name has been besmirched. It'll take us a long time to dig back out of this. I've seen my family emotionally react to this. And why should I put them through this anymore? We can better serve the stockholders and the employees by associating the company with a very strong firm.'"

Stephens Inc. was the exclusive financial adviser for Tyson Foods and wrote the fairness opinion, says Frank Thomas, a Stephens spokesman. The deal is worth about $650 million based on Tyson Foods' closing stock price Sept. 3. That's about $21-$22 a share for Hudson Foods.

'Win-Win for Both Companies'

At a press conference at Tyson's headquarters Sept 4, the day the deal was announced, Red Hudson didn't go into detail about the reasons for the merger. Asked if the beef recall prompted his decision to sell, he termed the recall "an unfortunate situation."

"That's history," Hudson says. "We still don't know where the product came from that created the problem. But that's history. We closed the plant first. We sold the plant and closed its books."

From all indications, the deal is a very good one for Hudson Foods. For years, Hudson's stock has traded at price-to-earnings and price-to-book value ratios cheaper than Tyson's stock.

"Hudson has been on a pretty good growth track with revenue for the past couple of years," says Brian Eisenbarth, a research analyst with Collins & Co. in San Francisco. "They've expanded with some new facilities. All the work that Hudson has accomplished over the past two years now becomes Tyson's work. It's probably cheaper for them to acquire Hudson than it would be for them to expand their food processing facilities themselves."

Eisenbarth says he had anticipated before the announcement of the sale that Hudson Foods would improve its profitability in the next few quarters. He had a buy recommendation on the Hudson stock well before the troubles of the past two months.

Eisenbarth says, comparing valuations, that Hudson has traded at a substantial discount to Tyson Foods.

"It appeared that between a $20-$25 price of Hudson would bring it more in line with the proper valuation with what the market was awarding Tyson," Eisenbarth says. "So, I don't think Tyson is really overpaying for Hudson. I think it's a win-win for both companies. Tyson is getting Hudson at a fair price and Hudson's shareholders will now become part of a larger, stronger organization."

Shane Glenn, an analyst with Stephens who covers Tyson Foods, says the acquisition will be very beneficial for Tyson.

"It gives them a good portfolio of brands and a significant exposure into the turkey industry, which they didn't have previously," Glenn says. "It gives them a good portfolio of products in the value-added products. And there should be a lot of cost savings and synergies there that Tyson will be able to achieve because of similar customers.

"And there are a lot of geographic synergies and operating synergies."

At the Sept. 4 news conference, Leland Tollett, Tyson Foods' chairman and chief executive officer, gave no indication of how many Hudson employees may be phased out because of the merger.

"We are a people-oriented company," Tollett says. "In situations like this, obviously, there are some relocations and maybe even some duplicated jobs that we'd have to take a look at, but historically we need people rather than the other way around."

Tough Times

Hudson Foods has gone through a difficult past two months. Even before the beef recall was first announced Aug. 12, Hudson Foods had been forced to take a $33 million writeoff in July because it was unable to recover funds from a Russian poultry wholesaler. After taxes, the charge amounts to about $20 million.

Despite the back-to-back financial disasters in July and August, Hudson's stock price has been amazingly resilient.

On July 10, the day before Hudson announced the Russia writeoff, Hudson's stock closed at $16.50. It dropped only $1.25 after the writeoff was announced. It was down just 13 cents to $16.25 on Aug. 12, the day the USDA first demanded Hudson recall 20,000 pounds of beef, and even though that escalated to 25 million pounds in the next few days, the stock price wasn't bothered much. Hudson closed at $17.38 on Sept. 3, the day before the deal with Tyson Foods was announced.

Red Hudson said at the Sept. 4 news conference announcing the transaction that Don Tyson, Tyson Foods senior chairman, first approached him about selling Hudson Foods 12 years ago.

Hudson says he and Tollett may have talked five or six times since then. Hudson and Tollett live across the street from each other in the Pinnacle subdivision of Rogers.

The northwest Arkansas source says that as many as three companies may have approached Hudson Foods about an acquisition. The companies all have been interested in acquiring Hudson over the years, the source says.

Besides Tyson, ConAgra Inc. has also shown an interest in Hudson in past years. The source wouldn't name the third company.

"I think that all of them said, 'Red, if you need to do something, let us know. We're here,'" the source says. "And I'm still not positive in my own mind that we won't have somebody else come in and bid higher than Tyson has bid."

The sale is a sad ending to Red Hudson's growth of the company, the source says.

"He spent 25 years building that company," he says. "He founded it, nurtured it. He lost sleep over it, grew gray hairs and built it from nothing. It's really a dirty shame that some penny-ante bureaucrat can ruin all that in a grab for power.

"Whether there will be further litigation as a result of that, who knows? [Red Hudson] has certainly been damaged. The company would have sold less than a year ago for substantially more than it did. I believe the company would have sold as high as $28 a share."