Pilgrim's Pride Ups the Ante for Hillshire Brands

I see your $55-a-share bid and raise you $5 a share. Pilgrim's Pride just raised the pot for packaged meats and desserts specialist Hillshire Brands  to $6.7 billion, in a high-stakes, winner-takes-all poker game being played out against Tyson Foods , which bid $6.1 billion. 

Since Tyson previously trumped Pilgrim's original $45-a-share offer for the owner of Jimmy Dean sausage and Sara Lee desserts, it now comes down to who will call whose bluff. Regardless of who blinks first, it's clear a side deal for Hillshire to acquire Pinnacle Foods , a transaction that originally set the poker match in motion, now seems likely to fold, as both Pilgrim's and Tyson require the packaged consumer products company to scuttle the offer.

Hillshire Brands has a portfolio of products that tend to be the leading brands in their respective categories. For example, Jimmy Dean breakfast sausages have the top market share in the space, as does Ball Park franks, State Fair corn dogs, and Aidell's super premium sausages, helping Hillshire generate some $4 billion in revenue in 2013. While retail sales were up 3.2% in the third quarter as higher prices were able to offset falling volume, segment operating income surged 20% year over year, explaining why both Pilgrim's and Tyson were eager to go all-in on acquisition.

Branded goods like those stocked by Hillshire carry higher margins, a particularly attractive option for the meat processors who've faced rising costs from commodities, feed, and the animals themselves. The pork market, for example, has literally been decimated, as one in 10 piglets has succumbed to porcine epidemic diarrhea virus, or PEDv. Cattle herds are at levels they haven't been seen since 1951, causing beef prices to surge to record highs. 

Brazilian meat processor JBS , which bought 75% of Pilgrim's Pride in 2009, has been making acquisitions to further integrate its meats into the U.S. market and sees the Hillshire takeover as a means of padding its profits in a way that simply selling private-label meat products to supermarkets, a typically low-margin business, can't do.

For its part, Tyson no doubt wants to pad its own prepared foods business. It is the top poultry producer with a 21% market share, ahead of Pilgrim's second place 18% share; it is the No. 1 beef producer at a 23% stake in the market, compared with JBS at 21%; and it is second in pork production behind Smithfield Foods, itself a recent acquisition target.

Prepared foods, however, account for only 10% of revenues but just 7% of its operating income, so a profitable portfolio of branded products would provide a needed boost to the business.

A deal with either Pilgrim's or Tyson makes more sense strategically than Hillshire's $4.3 billion bid for Pinnacle, the owner of brands like Vlasic and Bird's Eye, despite its CEO's comments about how complementary meat and vegetables are. But with Pilgrim's now offering as much as Hillshire's market value is worth, a 49% premium to where the stock was trading before the bidding war began, it is now becoming a richly valued target and likely bumping up against a ceiling here.

Tyson may increase the bid slightly, or otherwise sweeten the pot, but I don't think we'll see any more big bets here, and the meat processor could just as easily fold its hand.

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