Food Fight

02:15AM Aug 06, 2014
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( Tyson Foods )

Companies seek to gain margins by squaring off in merger frenzy

It was a heavyweight battle to the end. This spring, Tyson Foods Inc. and Brazilian rival JBS SA went against each other in a private auction bid for Hillshire Brands Co., the maker of Jimmy Dean sausage and Ball Park hot dogs. Both sought to add more pork to their assets.

In June, Tyson Foods won the bid with an $8.55 billion offer. It is the meat-industry’s biggest merger. The company paid $600 million more than necessary, in part because of a closed bidding process, analysts say. 

In July, Tyson reached a formal purchase figure of $7.7 billion. The deal is set to close by Sept. 27. Hillshire called off its planned $4.3 billion acquisition of Pinnacle Foods, and Tyson will pay the breakup fee.

The combination positions Tyson as a leader in the retail sale of prepared foods with complementary  brands including State Fair and Wright Brand. The strength of Hillshire’s breakfast products will enable Tyson to capture opportunities in the fast-growing category.

Power Plays. "The Hillshire Brands acquisition will represent a defining moment for Tyson Foods," says Donnie Smith, Tyson’s president and CEO. "Our strategy has been to grow our prepared foods business, and it has been our aspiration to be a leader in retail prepared foods just as we are in chicken. Now we will have those iconic No. 1 and No. 2 brands in numerous categories."

Tyson expects to realize annual synergies in excess of $300 million, driven primarily by efficiencies in operations, purchasing, distribution and supply chains; raw-material upgrades; combined sales and marketing teams; and the alignment of shared service functions. Synergies are expected in the first full fiscal year, with total synergies to be realized by the end of the third year.

The purchase follows other recent food-industry deals. In 2013, China’s biggest pork processor purchased Smithfield Foods Inc. for $4.7 billion. Berkshire Hathaway Inc. and 3G Capital spent $23 billion to buy H.J. Heinz Co. 

Much of the industry’s pricing power has shifted to big retailers such as Wal-Mart Stores and Costco, and meatpackers such as Tyson want to increase profit margins with brand-name packaged foods. 

Products from Hillshire include its namesake lunchmeats and Aidells sausages. The company has annual sales of roughly $4 billion.

Effects on Producers. The deals have sparked concern that less competition might lower prices paid to producers while raising retail prices for consumers at the supermarket.

"To the extent that Hillshire had market power, the sale is not good for hog producers; less competition means monopsony buyers will pound down their offer prices—and they will get away with it, to some degree," says Jerry Gulke, president, The Gulke Group.

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Top Meat Processors

The meat processing industry is valued at $325 billion. When Tyson acquires Hillshire, together they will account for more than 50% of the market: