What Happens to Price After the Food Fight?

The past few weeks have been all but mundane in the world of retail food products. Two big chicken producers, Pilgrim’s and Tyson Foods, have waged a food fight over acquiring Hillshire Brands for retail market dominance.

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On May 27, Pilgrim’s Pride (PPC) offered to buy Hillshire Brands Company for $5.6 billion, then two days later Tyson Foods (TSN), offered $6.2 billion for Hillshire.

Pilgrim’s is the second-largest chicken producer in the world. They employ approximately 38,000 people and have the capacity to process more than 36 million birds per week for a total of more than 9.5 billion pounds of live chicken annually. Pilgrim’s is owned by JBS S.A. the largest animal protein company in the world.

Tyson Foods, Inc. is one of the world’s largest producers of meat and poultry with over $34.4B in annual sales, they process over 41,000,000 chickens, 135,000 cattle and 391,000 hogs per week.

Formerly part of Sara Lee Corp., Hillshire Brands (NYSE: HSH) is a leader in branded foods. The company generates nearly $4 billion in annual sales and has approximately 9,000 employees. Hillshire Brands’ portfolio includes iconic brands such as Jimmy Dean, Ball Park, Hillshire Farm, State Fair, Sara Lee frozen bakery and Chef Pierre pies, as well as artisanal brands Aidells, Gallo Salame and Golden Island Jerky.

Hillshire Brands has also recently been on a buying spree of their own to enhance and increase their presence in leading retailers. Just last month, Hillshire completed its acquisition of Van’s Natural Foods from Catterton Partners. Van’s is a leading better-for-you brand with simple/clean ingredient food brands in frozen breakfast and snack foods, including waffles, pancakes, cereal, crackers and snack bars. Van’s frozen breakfast and snack foods are available at grocery stores, mass merchandise stores and natural food retailers nationwide.

A few weeks after the Van’s deal, Hillshire announced plans for a $4.2B acquisition of Pinnacle Foods a leading producer, marketer and distributor of high-quality branded food products. Pinnacle’s name brands, such as, Birds Eye®, Armour®, Open Pit® and Vlasic®, are found in more than 85% of American households.

How Much is Hillshire Worth?

Hillshire Brands knows how to innovate new products and market them. Acquiring Hillshire would give either bidding company increased scale and presence in Frozen, Refrigerated and Dry retail spaces – a move which would help further vertically integrate their businesses and be in the center of retail stores.

Pilgrim’s and Tyson also know that commodity meat is a low margin business compared to the margins that are made on prepared foods. Hillshire’s strong portfolio of retail brands stands to improve their gross margins and boost profits for shareholders.

Pilgrim’s offered $5.6B / $45 per share – a 25% premium over Hillshire’s stock price the day of the announcement, a multiple of 12.5x Hillshire’s EBITDA. Tyson’s then raised the stakes to $6.2B / $50 per share – at a 35% premium over Hillshire’s stock price the day of the announcement, a multiple of 13.4x Hillshire’s EBITDA. Pilgrim’s responded (as of today) in smackdown fashion with a $6.7B / $55 per share counteroffer.

Both companies also want Hillshire to call off its planned $4.2B acquisition of Pinnacle Foods and are willing to pay the $164M breakup fee. It would appear they generally consider Pinnacle’s products to be outside of their core interests.

How Will This Affect Consumers?

The Hillshire deal may be good for shareholders of the companies who invest for positive returns, however it may not be a case of what’s good for the goose, is good for the gander, for retail shoppers. We may be paying higher prices when all is said and done.

Over the last year, consolidations in the food service industry such as, Sysco’s acquisition of US Foods and Smithfield’s sale to the Chinese have the potential to prove equally problematic for consumers. Both of these deals portend to reduce competition, giving consumers less choice and less opportunity to vote with their dollars. These types of scenarios are not limited to the food industry either. The airline industry is often taken to task on limited choices due to price fixing.

2014 marks the 100th anniversary of the Federal Trade Commission Act and the Clayton Act, two laws passed in compliment to the first anti-trust law, the Sherman Act of 1890. These laws were passed to guard against monopolistic practices: to protect the process of competition for the benefit of consumers, making sure there are strong incentives for businesses to operate efficiently, keep prices down and keep quality up. In my opinion, the consolidation of companies means less competition which I believe drives higher prices.

You can’t help but wonder if trends like these continue whether food companies will reach the pinnacle of being “too big to fail” like the retail banking industry during the financial crisis of 2007-2008. Will less choice, higher prices and bail outs, ultimately become the status quo?

From the desk of John Cecala | |Website LinkedIn @BuedelFineMeats  Facebook

 

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