Global scramble for branded meats heats up with bid for Hillshire

LOS ANGELES/CHICAGO Thu May 29, 2014 8:08pm EDT

LOS ANGELES/CHICAGO May 29 (Reuters) - The bidding war for Hillshire Brands Co could herald further deals as meat companies seek to round out their assets from farm to table in a food frenzy that accelerated after China's acquisition of Smithfield Foods a year ago.

The deals also are being fueled by Americans' increasing appetite for protein: Profit margins in chicken production have become fat even as tight supplies in the beef and pork markets have driven up prices, raising costs for producers and prompting some consumers and retailers to reach for poultry products.

Global mergers and acquisition activity in the meat products sector has totaled $20.3 billion so far this year, a 98 percent increase from the same period in 2013, according to Thomson Reuters.

Tyson Foods Inc on Thursday offered to buy Hillshire Brands Co for $6.3 billion excluding debt, upstaging Pilgrim's Pride Corp's bid for the sausage company earlier in the week, in a deal that would broaden Tyson's branded supermarket food offerings.

"We've had a very strong protein cycle. It generated a lot of cash and healed up balance sheets, which gives protein companies significant fire power" when they're shopping for deals, Stephens analyst Farha Aslam said.

"The profits in poultry have been very good, and both Tyson's and Pilgrim's Pride operating performances have been very strong," said Brian Weddington, a senior credit officer at Moody's Investors Services.

Some analysts say China's Shuanghui International Holdings Ltd set the food fight in motion last May when the company, now called WH Group Ltd, bought Smithfield Foods Inc in a deal valued at $4.7 billion, excluding debt.

Even at that time, bidders were circling. The Wall Street Journal reported that Thailand's Charoen Pokphand Foods PCL was among a crowd of suitors eager to gobble up Smithfield when Shuanghui made its move.

The Smithfield-Shuanghui deal underscored how international investors are expanding their interests in food commodities to feed a global middle class, as well as planting a flag in American grocery and meat aisles. Tyson is based in Springdale, Arkansas, and Pilgrim's Pride is controlled by a unit of Brazil-based JBS SA.

"It opened up the door to what we're seeing now," said Vicki Bryan, a senior high yield analyst with Gimme Credit LLC. "People suddenly realized that there were so many buyers - and sellers [in the protein sector]."

Tyson Foods on Thursday told Reuters the bid for Hillshire was unconnected to the Smithfield-Shuanghui deal. But Tyson spokesman Gary Mickelson said the company "mapped out our vision for the next few years" in internal discussions that occurred about a year ago.

Tyson executives on a conference call with reporters Thursday said the strategy sessions identified three important target growth areas: prepared foods, value-added poultry and international markets.

Tyson's offer for Hillshire took direct aim at the packaged food portion of that plan. The company's $50-per-share offer topped the $45 per share offer that Pilgrim's submitted on Tuesday.

Branded meat products have higher and more stable margins than unbranded commodity meats, Bernstein Research analyst Alexia Howard said in a client note.

Hillshire, whose products include Jimmy Dean sausage and bacon and Ball Park hot dogs, could be a "once in a lifetime" opportunity for companies like Tyson or Pilgrim's, Howard said.

Hormel Foods Corp, Sanderson Farms Inc and Toronto's Maple Leaf Foods Inc could participate in future deals, analysts said. (Reporting by P.J. Huffstutter; Editing by Lisa Shumaker)