Groundhog Day – PPC, HSH and TSN

nicklipinski

Last week, we suggested that it was likely that PPC would remain engaged in its pursuit of HSH subsequent to TSN offering a $50 per share counter-bid for the company.

  • Sure enough, the Wall Street Journal is reporting that PPC is boosting its offer to $55 per share, or $620 million above the prevailing TSN bid;
  • We had also suggested that the EV multiple of trailing twelve months EBITDA was getting “aggressive” with the prior bid – now, let’s replace “aggressive” with “stupid silly” as HSH is now being valued at 13.9x EV/TTM EBITDA;
  • To put that number in perspective, both Heinz (acquired by 3G Capital) and Cadbury (acquired by Kraft, old style) were purchased for EV/EBITDA multiples in the 13.0x range. While both companies had their warts, both companies were unquestionably truly global businesses with iconic brands;
  • We could have a reasonable debate as to whether or not HSH is even a national business;
  • This new offer places PPC’s debt/EBITDA ratio at an unsettling 5.3x (approximately)

As we also mentioned previously, TSN CEO and President Donnie Smith suggested the acquisition of HSH was “critical” to the company, which, if we are to take him at his word, means that it is possible, though in our opinion, very foolish, that TSN remains engaged in this process.

  • A bid of $57.50, for example, stretches TSN’s pro forma debt to EBITDA position to 3.5x – and bear in mind, these EBITDA numbers are not staples EBITDA results – these are cyclical companies at or near a cyclical peak – TSN’s 2015 EBITDA could very well be 2/3 of the trailing twelve month result.  Our belief is that TSN won’t be (and shouldn’t be) comfortable with its leverage ratio and does a secondary offering shortly after the deal closes, if it is the acquirer.
  • Also, contemplate this – if investors liked this deal for TSN because of potential cost synergies, the difference between TSN’s original bid ($50 per share) and our hypothetical bid ($57.50) is $930 million.  HSH’s trailing 12 month SG&A expense is $772 million.  Said another way, if the opportunity was for TSN to remove every single dollar from the HSH cost structure but for direct product costs (that wasn’t the opportunity, but we digress), the entire cost rationale to TSN has been lost by this bidding war.

Our assessment of the strategic rationale behind this transaction for both companies has not changed, but the price to be paid certainly has, and we now believe that this process won’t have a winner – investors will be left with a protein processor at peak chicken margins and a similar company on the other side, only this one having substantially overpaid for an acquisition.

We will stick with our prior assessment that if the Brazilians want it (PPC’s majority owner is JBS SA), they will get it.

  • Thinking (and writing) out loud a bit, HSH makes more sense within the context of some of JBS’ other U.S. business – JBS Pork/JBS Beef (recall that JBS owns Swift).
  • It is possible that the ultimate goal of JBS is to combine HSH and the poultry assets (PPC) into JBS USA, much the way it did with JBS Foods in Brazil in an effort to focus on more value-added products.
  • Of course, that would require JBS to buy out its minority shareholders in PPC, but we think that is the path that the company may be heading down, with HSH as a catalyst.
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