Quick Thoughts – HSH, TSN and PPC (Second Verse, Same as the First?)

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This morning, TSN announced a proposal to acquire HSH for $50 per share in an all cash deal, effectively trumping PPC’s $45 per share offer that likely hadn’t even had time to cool off it was so fresh out of the oven.

o   The EV multiple of trailing twelve month EBITDA is getting aggressive – the new deal values HSH at 12.7x EV/TTM EBITDA.

TSN CEO and President Donnie Smith suggested the acquisition of HSH was “critical” to the company, which struck us as somewhat odd, given that speculation was rampant that TSN was very much involved in courting Michael’s Foods (the asset eventually went to POST);

o   Was Michael’s also “critical”, or was simply doing a deal, any deal, critical?  If it is the latter, that strikes us a canary in the coal mine with respect to how TSN management views the sustainability of current margins.

In our original note, we mentioned the possibility of an overbid by TSN given the underlying strategic rationale behind the transaction (moving toward a more branded and less commodity focused portfolio).

o   We are somewhat surprised that TSN was willing to offer all cash, though the nature of PPC’s offer almost certainly took a significant stock component off the table;

o   Despite the robust multiple implied by TSN’s bid, we can still see PPC remaining engaged in the process.  Keep in mind that PPC is a subsidiary of the largest protein producer in the world, JBS SA.  Obviously, the $50 per share in cash is the starting point, which stretches PPC’s pro forma debt to EBITDA ratio to the edge of our comfort zone (4.9x), but adding a stock component to the bid is certainly possible.  Ultimately, we believe that if JBS wants HSH, JBS gets it.

Investors have to go back to November of 2000 (happy to be corrected on this) to see a bidding war for a publicly traded staples company – Quaker Oats, courted by PEP (the ultimate “winner”), KO and Danone.

o   The bidding was for Gatorade at its volume growth peak, and we aren’t sure the events would have transpired in the same fashion with the benefit of hindsight;

More broadly speaking, we are left wondering if there isn’t a broader market signal to be gleaned from increased M&A activity, suggesting we are closer to a market top than a market bottom.

While we acknowledge the strategic rationale for this transaction, we see no reason to be involved in TSN – the multiple for HSH is rich, and management’s stated imperative to do a deal (apparently any deal) is a signal regarding the company’s core business that we think investors ignore only at their own peril.  Finally, if PPC remains engaged in this bidding war (and we think they may), there is a chance that TSN loses the asset or pays a price beyond $50 per share that makes it difficult, if not impossible, for management to extract value from the deal.

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