Pinnacle Foods Could Be the Best Bet in a Complicated Food Fight
The packaged-foods company looks like a bargain, even if Hillshire Brands, itself pursued by suitors, drops its bid.
A pair of meat-filled merger announcements had investors pushing aside their peas last week. But the best bargain could lie in the vegetable aisle.
Allow us to explain. Tyson Foods (ticker: TSN), which processes chicken, beef, and pork, offered Thursday to buy Hillshire Brands (HSH), the maker of Jimmy Dean breakfast sausage and Ball Park franks, for $6.1 billion, or $50 a share, in cash. The bid topped an offer made two days prior by rival Pilgrim's Pride (PPC), which sought to buy Hillshire for $45 a share.
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Food fight! Tyson Foods and Pilgrim's Pride have both bid for hot-dog producer Hillshire. Both bids seem likely to spoil a third deal put on the table earlier last month, when Hillshire agreed to buy Pinnacle Foods (PF), paying $18 plus half a Hillshire share for each Pinnacle share. Pinnacle's diverse portfolio includes Birds Eye frozen vegetables, Duncan Hines cake mixes, and Wish-Bone salad dressing. Hillshire is widely expected to take the highest bidder's cash and ditch Pinnacle at the checkout counter.
Hillshire's stock jumped 44% on the week, to $53.28, while Pinnacle fell 6% to $31.31. That leaves the stock about 15% below the proposed deal price on May 23, before bidders first converged on Hillshire.
Money manager Mario Gabelli, of Gamco Investors, was right about Hillshire, twice. "It will be bought by someone," he said at last year's Barron's Roundtable, when shares sold for $29 and change ("Here's What's Cooking for 2013," Jan. 21, 2013).
In a phone call two weeks ago, after Hillshire's bid for Pinnacle, Gabelli was still hungry for takeout, saying Hillshire would be "better off being bought."
While the protein producers settle their beef, investors would be wise to turn their attention to Pinnacle. Although Hillshire's offer for Pinnacle is in danger, it gives investors a sense of what the stock could be worth to another buyer: $36 and change. Perhaps no one else will bid soon, but that could work out well for three reasons.
First, Hillshire's buyer will have to pay Pinnacle a $163 million termination fee. That's not pocket change to Parsippany, N.J.-based Pinnacle, which earned $183 million last year. Second, Pinnacle, taken public by Blackstone Group (BX) in a March 2013 initial stock offering, is succeeding with its strategy of buying well-known brands, cutting costs, and returning cash to shareholders. Even before the Hillshire bid, shares had climbed 37% to $30.45 since their first-day close. They yield 2.7%.
Third, Pinnacle looks reasonably priced. Next year's projected free cash flow of $335 million gives the stock a free-cash-flow yield of 9.1%. That compares with 4.6% for Kraft Foods Group (KRFT), 5.6% for Campbell Soup (CPB), 8% for B&G Foods (BGS), and 4.6% for Hormel (HRL). That's a good deal, whether or not there's a bull's-eye on the Birds Eye.