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Update: Tyson Foods Wants to Buy Hillshire Brands In $6.8B Deal

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Tyson Foods Inc. of Springdale on Thursday proposed the biggest acquisiton in its history, offering to purchase Hillshire Brands of Chicago for $50 per share, or about $6.8 billion. 

The meat processor said its offer represents a 35 percent premium for Hillshire shareholders, who were dealing a takeover offer on Tuesday and its own bid to purchase another food company, announced on May 12.

Hillshire is a meat processor that makes its namesake lunchmeats, Ball Park hot dogs and Jimmy Dean sausages. It has about 9,000 employees and $4 billion in annual sales. During a conference call on Thursday, Tyson Foods CEO Donnie Smith said a combination of the two food companies would be a “great strategic fit for us.”

“In particular, we believe that the strength of Hillshire’s products in the breakfast category would allow Tyson to capture opportunities from shifting consumer trends in this attractive and fast-growing daypart where Tyson has little presence today,” Smith said.

Tyson Foods’ proposal comes two days after chicken producer Pilgrim’s Pride of Greeley, Colorado, offered to acquire Hillshire for $5.58 billion, or $45 per share.

The offer also comes as Hillshire is considering its own proposal to buy Pinnacle Foods, which makes Birds Eye frozen vegetables, Duncan Hines cake mixes and Hungry Man frozen dinners, in a deal worth $4.2 billion. Both Tyson Foods’ and Pilgrim’s Pride’s offers are contingent upon Hillshire scrapping the Pinnacle purchase.

Hillshire had not responded to Tyson Foods’ offer as of 11 a.m. Thursday. On Tuesday, Hillshire said it would “thoroughly” review Pilgrim’s Pride’s offer, though it continues “to strongly believe in the strategic merits and value creation potential provided by the proposed transaction with Pinnacle Foods.”

If the deal goes through, it would be Tyson Foods’ biggest acquisition ever, topping its $3.2 billion cash-and-stock merger with beef and pork company IBP Inc. of Dakota Dunes, South Dakota, announced in 2001. The deal expanded Tyson Foods’ market share and put the company back in the pork business.

“We believe that there is a strong strategic, financial and operational rationale for the combination of Tyson and Hillshire,” Smith said in a news release. “Our proposal provides Hillshire shareholders with an immediate cash premium for their shares that we believe is both greater and more certain than what can be attained in the near term by the Company either on a standalone basis or in combination with any other food processing company.”

In a conference call, Tyson Foods executives said their offer wasn’t a response to Pilgrim’s Pride. Smith said the company had no contact with Hillshire until Thursday morning, when it notified Hillshire if the offer by phone and letter.

Rather, Smith said the proposal came from planning about the company’s future. He said company leaders met about a year ago to discuss long-term plans, including growing Tyson’s prepared food segment.

Buying Hillshire Brands would be key to that growth. Smith said Tyson doesn’t have much exposure in the breakfast foods segment, a point of strength for Hillshire. Tyson Foods’ expertise in marketing and distribution and focus on private labels would mesh well with Hillshire’s branded products, executives said.

“We have been working on this for a long time,” Smith said. “It is the culmination of a lot of deep thought.”

Tyson CFO Dennis Leatherby called the chance to acquire Hillshire a “one plus one equals three opportunity.”

The Deal

Tyson Foods said its proposal “constitutes a significantly superior alternative to Hillshire’s previously announced agreement to acquire Pinnacle.” Tyson said its $50 per share price represents a 35 percent premium to Hillshire’s closing price on May 9, the day before it announced the Pinnacle deal.

Tyson Foods said the combination of the companies would “reposition Tyson as a clear leader in the retail sale of prepared foods, with a complementary portfolio of well-recognized brands and private label products, including Tyson, Wright Brand, Jimmy Dean, Ball Park, State Fair and Hillshire Farm.

The company also said the deal will allow the firms to “realize significant synergies” through the combination of the companies’ sales and marketing teams, distribution and supply chain resources and shared service functions. There would also be benefits from the “full integration” of the protein value chain, including “stable and consistent demand for protein products.” 

Tyson said it expects that the transaction to be accretive to earnings per share in the first full year after completion.

Shares of Tyson (NYSE: TSN) were trading up 7 percent Thursday to $43.69. Shares of Hillshire (NYSE: HSH) were trading up 16 percent to $52.16.

Mergers and Acquisitions

Tyson Foods has made only three acquisitions since its game-changing deal to purchase IBP in 2001, all in the prepared foods space.

In January, the company announced the purchase of Bosco’s Pizza Co. of Warren, Michigan. Bosco’s is known for “The Original Bosco Stick” and makes a variety of stuffed breadsticks and frozen pizzas. It serves the food service sector and retail customers throughout the Midwest and some retailers nationwide. It employs about 150 people.

In June 2013, it acquired the assets of Circle Foods LLC, a producer of frozen and refrigerated handheld Mexican foods, uncooked tortillas and Indian flatbreads, from Montreal-based investment firm Claridge Inc. Circle Foods, based in California, has a 159,000-SF factory in San Diego and employs about 600 full-time workers.

And in February 2013, it bought Don Julio Foods of Clearfield, Utah, which makes flour and corn tortillas and snacks and sells products to retailers throughout the country under the Don Julio Authentic and Clover Club brands. It employs about 50 people.

But Tyson has experience making bigger deals. The company doubled its size in 1989, winning a hostile takeover battle with rival ConAgra to purchase Holly Farms. The deal added beef and pork to Tyson’s offerings.

Ten years later, the company bought of Hudson Foods for about $650 million.

Proposal Letter

On Thursday, Tyson Foods released a copy of the offer letter it sent to Sean Connolly, president and CEO of Hillshire:

May 29, 2014

Mr. Sean Connolly 
President and Chief Executive Officer 
The Hillshire Brands Company 
400 South Jefferson Street 
Chicago, IL 60607

Dear Mr. Connolly:

On behalf of Tyson Foods, Inc. (“Tyson”), I am pleased to formally propose to acquire 100% of the issued and outstanding shares of common stock of The Hillshire Brands Company (“Hillshire” or the “Company”) for $50.00 per share in cash. This proposal has the unanimous support of the Tyson Board of Directors.

This price represents a 35% premium to the unaffected closing price per share of the Company’s common stock on May 9, 2014, the day prior to the announcement of Hillshire’s proposed agreement to acquire Pinnacle Foods Inc. (“Pinnacle”). At a total value of $6.8 billion, our proposal represents a multiple of 13.4x Hillshire’s trailing LTM adjusted EBITDA. We believe that your shareholders would welcome the opportunity to realize an immediate and significant premium for their shares, and accordingly hope to work with you to reach mutual agreement as to a proposed transaction on the basis outlined in this letter.

We have followed Hillshire and its predecessor companies with great interest over the years and have been impressed by the progress your team has made in improving core business fundamentals, managing costs, and increasing operating margins. Moreover, we have great respect for Hillshire’s commitment to innovation, and to the strong brand presence the Company has built across all the categories in which it operates.

There is no financing condition to our proposal, as we have secured a fully committed bridge facility from Morgan Stanley Senior Funding, Inc., which we expect will be joined by JP Morgan Securities LLC in the very near future. We expect to maintain our investment grade credit rating following the proposed transaction, and are prepared to issue equity as a financing mechanism if it is determined to be prudent.

We believe that there is a strong strategic, financial and operational rationale for the proposed transaction. Accordingly, our proposed price reflects the considerable value we see in such a combination, providing your shareholders with a higher return on their Hillshire investment than we believe can be attained in the near term by the Company either on a standalone basis or in combination with any other food processing company.

With respect to your agreement to acquire Pinnacle, we believe that our proposed transaction constitutes or is reasonably expected to lead to a Superior Proposal (as defined in the Pinnacle merger agreement). Accordingly, we believe that your board of directors can and should, consistent with its fiduciary duties and its obligations under Section 5.4 of the Pinnacle merger agreement, make a determination to that effect and authorize the Company to provide us with a draft of an Acceptable Confidentiality Agreement (as defined in the Pinnacle merger agreement) as soon as possible. Both Tyson and its lead financial and legal advisors (Morgan Stanley and Davis Polk & Wardwell LLP, respectively) stand ready to engage in discussions regarding the proposed transaction without delay.

Our interest is in the Company on its own, and not as combined with Pinnacle. Accordingly, the termination of the Pinnacle merger agreement would be a condition to our proposed transaction.

Notwithstanding anything to the contrary contained herein, nothing in this letter constitutes or will be deemed to constitute a binding obligation of Tyson to proceed with, or consummate, the proposed transaction. Any potential transaction between Tyson and the Company will be subject to approval by our board of directors of the final terms and conditions of the transaction and the execution and delivery by Tyson of acceptable definitive agreements for the transaction.

We would have preferred to make this proposal to you privately, but in light of current circumstances we believe that it is in the best interests of your and our shareholders to have current and accurate information about our proposal and the reasons we believe that it is a compelling opportunity for both of our companies. For this reason, we are making this letter public simultaneously with my sending it to you.

We are very excited about this opportunity and hope to work with you toward the completion of a successful transaction. Should you have any questions regarding our proposal or wish to discuss it in greater detail, please contact me or our lead financial advisor, Morgan Stanley. As we consider the proposed transaction to be a time-sensitive matter, we would appreciate your timely response.

Very truly yours,

Donnie Smith 
President and Chief Executive Officer 
Tyson Foods, Inc.

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