Pilgrim’s Pride $6.2 Billion Offer for Hillshire Leaves Pinnacle Alone on Sidelines

Andrew Klips  |

In December 2008, chicken producer Pilgrim’s Pride Corp. (PPC) was filing for Chapter 11 bankruptcy protection, limping along with $3.75 billion in assets and $2.72 billion in debts. The then Pittsburg, Texas-based company needed to reorganize, already extending its temporary credit line three times in as many months and crumbling under the weight of a $1.3 billion acquisition of smaller rival Gold Kist Inc. in the year prior.  Almost a year to the day later – with fewer plants, a new feed mix and lower production – Pilgrim’s Pride emerged from bankruptcy, helped by the sale of a majority stake to Brazilian meat company JBS SA for $800 million. JBS currently holds about 75 percent of Pilgrim’s Pride.

Shares still lost ground in 2010 and 2011, but recovered to gain about 20 percent in 2012 and approximately 125 percent in 2013.  Heading into Tuesday, shares had advanced about 36 percent already in 2014.

Well, hopefully the economy isn’t going to collapse again and now Colorado-based Pilgrim’s Pride seems to be in a better financial position as it is getting aggressive with an acquisition proposal, announcing Tuesday that it will pay $45 per share, or $6.4 billion, for Hillshire Brands Co. (HSH) . The deal is contingent upon Hillshire, the maker of Ball Park hot dogs, Jimmy Dean and Sara Lee brands, nixing its $4.23 billion agreement announced two weeks ago to acquire Pinnacle Foods (PF) , the maker of Duncan Hines, Mrs. Butterworth and Hungry Man products.  Pilgrim’s Pride would be responsible for paying a $163 million termination fee to Pinnacle.

The Pilgrim’s/Hillshire merger would create a “fully integrated branded protein leader” with $12.4 billion in combined sales.  The deal has the unanimous support of the Pilgrim’s Pride board.

The proposal is at a 25 percent premium to 10-day volume weighted average price of HSH through Friday’s trading.   Pilgrim’s Pride says it will fund the all-cash transaction, which is about $5.7 billion in cash and the remainder in debt assumption, with existing liquidity and a new third party financing.

In the proposal letter from William Lovette, president and chief executive of Pilgrim’s Pride, to Sean Connolly, president and chief executive of Hillshire, Lovette cites Section 5.4 of the Hillshire/Pinnacle agreement, which reminds of the Hillshire board of it fiduciary responsibility to entertain a superior offer that is better for Hillshire shareholders than the acquisition of Pinnacle.

“For Hillshire shareholders, our proposal provides a substantial premium, greater certainty and immediate cash value for their shares,” said Lovette in a Tuesday statement. “With our complementary products, we believe that together Pilgrim's and Hillshire will better serve our combined customer bases for the benefit of all our stakeholders,” he added.

Pilgrim’s offer hit the wire at 7 AM ET.  At 11:21, Hillshire issued a short response to the unsolicited proposal, stating, “We continue to strongly believe in the strategic merits and value creation potential provided by the proposed transaction with Pinnacle Foods. Consistent with its fiduciary duties, and in consultation with its independent financial and legal advisors, Hillshire Brands’ Board will thoroughly review the Pilgrim’s Pride proposal.”

As board members mull the offer, Wall Street has spoken favorably of the Pilgrim’s Pride offer.  Shares of Hillshire have shot passed the proposal price to as high as $45.52. Shares of PPC did run up to $26.87, but have cooled back to $25.50 for 1.6% gains on the day.  Pinnacle is the one taking a hit here with the chance of the buyout disappearing. Shares are down more than 6 percent to $31.24 with one hour left in the trading session.

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