Was Tyson Foods’ winning bid for Hillshire Brands too high a price to pay? More than one analyst has questioned the price levels reached in the bidding for Hillshire Brands by Tyson Foods and Pilgrim’s Pride.
Tyson Foods submitted a binding offer to acquire Hillshire Brands for $63 per share in cash, in a bidding process that concluded June 8.
The all-cash transaction is valued at approximately $8.55 billion, including Hillshire Brands' outstanding net debt, and represents a multiple of 16.7x trailing 12 months adjusted EBITDA or 10.5x including $300 million in synergies.
“The Hillshire Brands acquisition would represent a defining moment for Tyson Foods,” said Donnie Smith, Tyson's president and chief executive officer. “Our strategy has been to grow our prepared foods business, and it has been our aspiration to be a leader in retail prepared foods just as we are in chicken. Now we will have those iconic No. 1 and No. 2 brands in numerous categories.”
But was the price for Hillshire Brands too high? The other bidder, Pilgrim’s, decided that for it the price, at that level, was too high.
Four days before the conclusion of the bidding, Morningstar stock analysts Ken Perkins and Erin Lash, concluded that Tyson was grazing on dangerous terrain even when the bid for Hillshire was at $55 a share and more than a billion dollars lower.
In the immediate term, Tyson Foods shares are trading down some. Tyson shares
traded at $38.25 on May 28, the day before it announced its opening bid for
Hillshire Brands of $50 a share. Tyson Foods shares opened at $36.05 today.
Longer-term benefits from combination of Tyson Foods, Hillshire Brands
What are the longer-term considerations? In a conference call with analysts on Monday, Smith made the case for the transaction at the $63 a share price based on both strategic and financial considerations.
Research shows that the long-term benefits of mergers and acquisitions of a strategic nature – when they are real – are often underestimated.
Speaking about the strategic rationale for the Hillshire acquisition, Smith said, “Brands like Hillshire Farms, Jimmy Dean and Ball Park don’t come available very often. This acquisition accelerates our growth in prepared foods. We have been very focused on both prepared foods and value-added chicken as the accelerators in our growth strategy. It really puts us in an opportunity to create a significant shareholder return.”
Low-premium v. high-premium deals
Is the price Tyson bid for Hillshire too high? There is, in fact, no single correct price for an acquisition, experts say.
Past research has shown that deals with low premiums often fail, as do deals done at high premiums. In fact, as many deals consummated at high premiums as low premiums end up producing net positive returns a year later.
It’s more about getting the right acquisition at the right price. That’s different for every company and every deal.
“Hillshire’s business is very complementary to Tyson’s business, and their culture is very complementary to ours which should make for a smooth integration,” Smith said. “A lot of times in transactions like this it is in the integration that things get gummed up a bit. So we are really optimistic about how the complementary cultures will aid in the synergy capture.
“That is what we were thinking about. That’s what drove us to the price target. We believe this will create significant shareholder value over time,” he said.