Beef or Chicken? Pilgrim’s Pride Weighs Its Next Move

April 1, 2015 10:08 AM
 
Beef or Chicken? Pilgrim’s Pride Weighs Its Next Move

Pilgrim’s Pride Corp. may be ready to strike a big deal, and it has the means to do it.

The U.S. chicken supplier controlled by Brazilian giant JBS SA could be due for its biggest acquisition yet, after dropping out of last year’s bidding war for sausage maker Hillshire Brands Co. The right transaction could help the company branch out as investors speculate the poultry market is hitting its peak, said BB&T Corp.’s Brett Hundley.

Pilgrim’s Pride could move into meat and pork by purchasing brands that Smithfield Foods Inc. may be willing to give up. Private-equity backed AdvancePierre Foods, whose burgers and chicken patties are eaten in school cafeterias, is another option. Or the $5.9 billion company could choose to double down on poultry by acquiring Sanderson Farms Inc.

As recently as February, Pilgrim’s Pride Chief Executive Officer Bill Lovette said the company’s interest in growing through acquisitions “remains very high, very strong.”

“They definitely want to be an acquirer and put some of their balance sheet to work,” Hundley, a Richmond, Virginia- based analyst, said in a phone interview. “The Street wants to see them diversify their platform -- moving into beef, pork, more value-added foods.”

Deal Resources

Sanderson is valued at $1.8 billion, and AdvancePierre is reported to be for sale for about that much. Pilgrim’s Pride has the wherewithal for a takeover of that size even after paying a $1.5 billion special dividend and buying Tyson Foods Inc.’s Mexico unit. Gimme Credit’s Vicki Bryan projects it will have $720 million of free cash flow available for acquisitions, with room to increase debt.

A representative for Greeley, Colorado-based Pilgrim’s Pride declined to comment on the company’s takeover plans.

While Pilgrim’s Pride says consumer demand for chicken will continue rising, some investors see the market topping out and eroding margins. Valued at just 3.9 times Ebitda, Pilgrim’s Pride shares are so cheap that they’re now in the company of beaten-down oil producers, according to data compiled by Bloomberg. Ebitda is an acronym for earnings before interest, taxes, depreciation and amortization.

Bets against the stock have climbed. About 14 percent of Pilgrim’s Pride shares outstanding are sold short, up from 2 percent in October, according to data compiled by Bloomberg and Markit. In a short sale, traders make money by selling borrowed stock and then buying it back after the price falls.

Valuation Gap

One competitor, Tyson, has been diversifying to help offset the cyclicality of chicken production. The Springdale, Arkansas- based company makes Jimmy Dean sausages, Sara Lee deli meats antopd Ball Park hot dogs. It’s valued at about 11 times Ebitda. Sanderson Farms, on the other hand, is still chicken-focused and trades for 3.3 times Ebitda -- even lower than Pilgrim’s Pride.

“To me it screams that you should diversify into more cash-flow stable businesses and more into consumer goods, instead of just being a pure-play in chicken,” Ken Shea, an analyst for Bloomberg Intelligence, said in a phone interview. “That’s why Tyson did what it did.”

Tyson gained those prepared-food brands through its $8.4 billion takeover of Hillshire last year. Pilgrim’s Pride -- with the help of parent JBS, the world’s largest meat producer -- was first to make an unsolicited bid for Hillshire, but Tyson stepped in with a higher offer and won. Pilgrim’s Pride and JBS are instead in the process of buying some Mexican and Brazilian assets from Tyson.

Takeover Candidates

If Pilgrim’s Pride wanted to gain scale in chicken, it could acquire Sanderson Farms. But if diversification is what investors are looking for, then there may be better candidates out there.

“Sanderson Farms is the one everyone’s pointing to because there are fewer and fewer targets left in the space,” Bryan, an analyst for Gimme Credit, said in a phone interview. “I’d like to see them incorporate something in the fresh or organic market niche.”

Hundley of BB&T said some of the Midwestern brands owned by Smithfield would be a good fit for Pilgrim’s Pride, such as John Morrell, Farmland and Armour-Eckrich. Smithfield was acquired in 2013 by Hong Kong-based WH Group Ltd., which could look to divest assets to pay down debt, he said.

There’s also AdvancePierre Foods. Its owner Oaktree Capital is preparing the sandwich supplier for a sale that could value it at more than $2 billion, including debt, according to a Reuters report in February.

“It’s an attractive asset, and it also has further margin improvement opportunities,” Hundley said. “We don’t think private equity has unlocked” the full potential.

Kraft Complications

While Oscar Mayer cold cuts are probably on Pilgrim’s Pride’s wish list, Kraft Foods Group Inc. is unlikely to sell that line because it’s “one of the few bright spots in Kraft’s portfolio,” he said. Kraft’s planned merger with H.J. Heinz, the ketchup maker controlled by 3G Capital and Warren Buffett’s Berkshire Hathaway Inc., could also complicate any deal.

With the backing of JBS and having just paid a large dividend, Pilgrim’s Pride can afford to be picky for the moment, Bryan of Gimme Credit said. After all, takeover targets within the industry may be pricey right now because of the high amount of food assets changing hands.

There were $69 billion of food acquisitions last year, preceded by a record $89 billion in 2013, data compiled by Bloomberg show. Of the major transactions, Tyson’s Hillshire purchase was one of the most expensive, at almost 19 times Ebitda.

“Pilgrim’s Pride has substantial capacity to make sizable acquisitions,” Bryan said. “But they’re not going to overpay. They’re smart.”

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