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Bloomberg: Scott Rostan “Real M&A: JBS’s Remaining Targets Lack Hillshire Appeal” 

By Brooke Sutherland

JBS SA (JBSS3) is running out of consolation prizes.

The Brazilian meat producer’s latest attempt at a major deal was quashed this week when Tyson Foods Inc. won the bidding war for Hillshire Brands Co. (HSH) with a record premium for the food industry. Last year, JBS was preparing a bid for Smithfield Foods Inc. before the hog producer agreed to sell itself to WH Group Ltd., people familiar with the matter said at the time. After passing on those deals, the $10 billion company’s acquisition options are narrowing, Deutsche Bank AG said.

One of the most appealing options for JBS — yet unlikely to ever go on the block — is Kraft Foods Group Inc. (KRFT)’s Oscar Mayer. Hormel Foods Corp. (HRL) would also be logical, although with a market value of $13 billion, it’s probably too big for JBS, according to Morningstar Inc. Other remaining North American targets are smaller. Chicken-producer Sanderson Farms Inc. and Maple Leaf Foods (MFI) Inc., which sold its bread unit this year to focus on packaged meats, are two options, Bloomberg Industries’ Kenneth Shea said.

“They’ll certainly be looking,” Kevin Dreyer, a money manager at Gabelli Funds, said of JBS in a phone interview. “There isn’t a tremendous amount that’s out there. It’s probably a little bit difficult to find something quite as tasty as Hillshire.”

Gabelli Funds is a unit of Rye, New York-based Gamco Investors Inc., which oversees about $48 billion and owns Hillshire and Tyson (TSN) stock.

Miguel Bueno, a representative for JBS’s parent company J&F Participacoes SA, said the company had no comment.

Go Meat

JBS’s North American poultry unit Pilgrim’s Pride Corp. proposed buying Hillshire for $45 a share on May 27, kicking off a bidding war that ended when Tyson upped its offer to $63 a share this week. Pilgrim’s then withdrew its own sweetened proposal of $55 a share, saying it was “in the best interests of our shareholders not to increase” the bid.

Tyson’s offer was about 70 percent higher than Hillshire’s average share price in the 20 days before the Jimmy Dean sausage maker drew acquisition interest. No other food industry deal of more than $5 billion has drawn such a high premium, according to data compiled by Bloomberg.

Hillshire hasn’t made any recommendation to shareholders on Tyson’s $7.7 billion offer, nor has it terminated its May 12 agreement to buy Pinnacle Foods Inc., a condition of both the Tyson and Pilgrim’s proposals.

 Higher Offers

JBS now has been sidelined in at least two big meat deals by companies willing to bid more. After the Smithfield Foods deal was announced last year, Chief Executive Officer Wesley Batista said he passed because the price was too high. The company also had expressed interest in Hillshire before, when it was still called Sara Lee Corp., people with knowledge of the matter said at the time.

With Hillshire likely out of reach, the takeover options for JBS and its Pilgrim’s unit are limited, Jose Yordan, an analyst at Deutsche Bank, wrote in a report this week.

Hormel is the first remaining acquisition candidate that comes to mind, Yordan wrote, although its size alone nearly rules it out as an option. As one of the few large unclaimed companies that’s focused on higher-margin consumer meats, Hormel shares Hillshire’s appeal, according to Liang Feng, a Chicago-based analyst at Morningstar.

“It’s very tough to see how Pilgrim’s Pride, even with JBS’s support, would be able to acquire a firm of Hormel’s size, unless it was a merger of equals,” Feng said in a phone interview. “But we haven’t seen any signs that Hormel really wants to do something like that.”

As a standalone company, Hormel, the maker of Jennie-O turkey, reported record revenue of $8.8 billion for the fiscal year ended in October. That compares with about $8.4 billion for Pilgrim’s in 2013.

 O-S-C-A-R M-A-Y-E-R

Kraft’s Oscar Mayer also makes packaged meats. Annual net revenue for the brand exceeds $1 billion, the company said in a regulatory filing. Dreyer of Gabelli said Kraft may have to take significant tax charges if it sells the unit, making such a move less appealing.

 Smaller Targets

Other remaining targets in the meat industry include Sanderson Farms (SAFM) or Maple Leaf Foods, Shea of Bloomberg Industries said. Both companies are smaller than Hillshire, with Sanderson Farms valued at $2.1 billion, and Canada’s Maple Leaf Foods at $2.4 billion.

Sanderson Farms’ focus on meat processing, a more commoditized business, means a takeover probably wouldn’t yield as many ways to boost revenue and cut costs for a buyer like Pilgrim’s, Feng said.

Maple Leaf Foods last month sold its Canada Bread Co. to Grupo Bimbo SAB. That followed the divestitures of its animal-rendering business, commercial turkey farms and hatchery operations in 2013. The company now focuses on protein products such as Top Dogs hot dogs and Golden Fry breakfast sausage.

Representatives for Northfield, Illinois-based Kraft and Austin, Minnesota-based Hormel said their companies don’t comment on acquisition activity. Representatives for Laurel, Mississippi-based Sanderson Farms and Maple Leaf Foods didn’t respond to requests for comment.

Kraft shares dropped 0.5 percent to $59.19 at 9:36 a.m. New York time, Hormel declined 0.2 percent to $48.46 and Sanderson Farms was little changed. Maple Leaf rallied 0.5 percent to C$18.76, while JBS rose 0.3 percent to 7.87 Brazilian reais.

Deal Digestion

JBS doesn’t have to do a deal. David Riedel, president and founder of Riedel Research Group Inc., said he hopes that the company doesn’t make a purchase and instead focuses on digesting the deals it’s already done and paying down debt. JBS has spent $12.7 billion on acquisitions in the last five years including its purchase of a majority stake in Pilgrim’s in 2009, according to data compiled by Bloomberg. The company has $14.3 billion of debt.

“They cannot keep reaching for ever-larger acquisitions to fuel growth,” Riedel, whose independent equity research firm focuses on emerging markets, said in a phone interview. “Investors should be thrilled to have them pause.”

Even so, JBS’s interest in both Smithfield and Hillshire suggests the company is interested in some kind of deal. It just may have to wait a while before something as appealing as Hillshire comes along again.

The good news for JBS in losing to Tyson is that it avoided stretching its balance sheet and overpaying for Hillshire, according to Riedel, who said he was glad the company didn’t continue to chase the deal.

JBS’s shares climbed 6.3 percent the day Pilgrim’s withdrew its bid, compared with a 6.5 percent slump for Tyson.

“This is a very, very large price being paid,” Scott Rostan, founder of New York-based Training The Street, which teaches new hires at investment banks how to structure mergers and acquisitions, said in a phone interview. “If you believe the synergy story, if you believe the operational story, this deal can work, but their margin for error has gone way down.