Billion dollar choices for Hillshire Brands

Processed-meat supplier Hillshire Brands has some deciding to do. After Pilgrim’s Pride offered $6.4 billion to purchase Hillshire earlier this week, Tyson Foods threw its hat in the ring with a bid valued at $6.8 billion.

“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,” said Donnie Smith, Tyson Foods president and Chief Executive Officer said in a media statement on Thursday.

On top of choosing whether to accept one of the two bids, Hillshire must consider whether it’s willing to give up its agreement to buy Pinnacle Foods (parent company of Birds Eye, Hungry-Man and Vlasic) for $4.2 billion. USA Today reported that Hillshire — maker of BallPark hotdogs and Jimmy Dean sausage products — was looking to merge the two companies’ complimentary convenience foods.

The cost of dropping that commitment would be $163 million, according to the Wall Street Journal.

The Wall Street Journal also suggests that it’s those same packaged, high-margin products that are attracting Tyson and Pilgrim’s Pride.

The fact that Hillshire is a hot commodity right now likely doesn’t come as a surprise to the company, reported the New York Times:

Hillshire has known it was a target for some time. A few months before it made its offer for Pinnacle, Pilgrim’s Pride privately approached the company about a merger but was rebuffed.

No matter what direction Hillshire goes in, it’s clear we’re in for future consolidation in the meat industry.

The big players in the meat supply chain are looking to diversify their portfolios. Tyson, for instance, has long prioritized its cross-protein and prepared foods offerings. The company has also invested in product innovation in its Discovery Center to develop those higher margin value-added products. This move has helped Tyson weather the storm of high feed prices and a tight supply for a rotating array of proteins over the last few years.

After Pilgrim’s Pride made its bid, Forbes addressed the instability of commodity meat companies right now.

Fresh chicken products (pieces or whole) make up ~60% of its [Pilgrim’s Prides’] sales. The business is fraught with inherent problems such as volatile feed costs (mostly corn and soybeans) and negligible pricing power. In the meat processing business, EBITDA margins are generally around 7-10% depending on feed costs and meat prices.

It’s also important to note that the companies being pursued in this cross fire of bidding both sell convenience foods. In the food industry we can shout that the consumer interest around cooking and fresh foods is strong, but that interest is not at odds with the shopper's desire to make meals quickly.