By Jacob Bunge and Annie Gasparro
Hillshire Brands Co. agreed to buy Pinnacle Foods Inc. for $4.3
billion in a bet that mixing hot dogs and frozen cakes with
pickles, syrup and salad dressing will add up to a more appetizing
business.
The deal, announced on Monday, would create a company with about
$6.6 billion in annual revenue and a broad array of brands
including Hillshire's namesake lunch meats, Jimmy Dean sausages,
Ball Park hot dogs, and Sara Lee frozen desserts plus Pinnacle's
Vlasic pickles, Wish-Bone salad dressings, Birds Eye frozen
vegetables and Log Cabin syrup. Pinnacle, which is majority owned
by investment firm Blackstone Group L.P., estimates 85% of U.S.
consumers buy at least one of its products.
"When you combine the two, you open up new growth opportunities
that don't exist independently," said Hillshire Chief Executive
Sean Connolly. Also, "Pickles go with sandwiches," he quipped in an
interview. "They're complementary businesses."
Deal making in the food sector has surged in the past two years
as companies contend with a menu of stubborn challenges. The
growing clout of giant retailers in the grocery business,
especially Wal-Mart Stores Inc., has crimped the pricing power of
packaged-food producers. Meanwhile, consumer spending remains soft,
and many shoppers are turning to fresher options that they feel are
healthier. Packaged-food companies also have responded with efforts
to cut overhead by closing inefficient factories and laying off
employees.
Food-company deals last year reached $54 billion in total value,
29% higher than 2012's total, according to data provider Dealogic.
So far this year, companies have struck deals totaling $28.5
billion.
Many of the recent deals aim to broaden companies' reach into
different corners of the supermarket. Post Holdings Inc. last month
announced a $2.45 billion deal for Michael Foods Inc., adding eggs
and dairy products to its cereal offerings. Hormel Foods Corp.,
owner of Spam and Dinty Moore stew, last year paid $700 million to
buy Skippy peanut butter. Hillshire itself last month bought waffle
and cereal company Van's Natural Foods for about $165 million.
Pinnacle's brands give Hillshire even more offerings across meal
and snack categories where it hasn't been strong, and a deal could
increase its leverage with supermarkets and mass retailers in
deciding what products to stock, where they're placed, and what
promotions they do.
The deal, expected to close by September, is Hillshire's biggest
since the company, formerly known as Sara Lee Corp., spun off its
coffee and tea business in 2012 to focus more on U.S. food sales,
renaming itself in the process.
Mr. Connolly will retain the CEO position at the combined
company, which will keep the Hillshire Brands name and remain based
in Chicago. He said Pinnacle CEO Bob Gamgort will leave the company
upon completion of the deal.
Pinnacle shareholders will receive $18 in cash and a half share
in Hillshire for each Pinnacle share. The companies said the deal
valued Pinnacle at $36.02 a share based on Hillshire's average
closing price before the announcement, representing an 18% premium
over Pinnacle's closing price Friday.
Hillshire shares fell 3% Monday to $35.76, while Pinnacle shares
rose 13% to $34.47. The stock moves left the companies with similar
market values: Hillshire at $4.4 billion based on Monday's close,
and Pinnacle around $4 billion.
Hillshire, whose sales have been flat in recent years, said it
is borrowing $4.8 billion for the Pinnacle acquisition, financial
strain that will cause it to lose its investment-grade status.
Hillshire Chief Financial Officer Maria Henry said it expects to
maintain its current annual dividend of 70 cents but will suspend
its share-buyback program for approximately two years. She said
Hillshire expects to regain an investment-grade rating for its debt
within three years.
"This consolidation buys them time, but it doesn't solve the
fundamental challenge" for Hillshire of achieving long-term,
sustainable growth, said Bill Bishop, a food industry consultant at
Brick Meets Click.
Parsippany, N.J.-based Pinnacle has been on its own acquisition
spree, and many of its brands have been gaining market share.
Blackstone bought it for $2.16 billion in 2007, then added Birds
Eye Foods Inc. in 2009 for $1.3 billion and the Wish-Bone salad
dressing business, which it bought from Unilever PLC last year.
Blackstone, which kept 51% of Pinnacle when it went public last
year, will own approximately 16% of Hillshire after the deal
closes, and it will have a seat on the combined company's
board.
Pinnacle has been persuading consumers to buy more of its
higher-margin products, a strategy that paid off last year, with
the company reporting a 70% increase in earnings to $89.3 million.
Shares of Pinnacle Foods had risen 26% over the past 12 months
through Friday's market close.
Hillshire said the combination will immediately benefit
earnings, and that it expects to save about $140 million in annual
costs by the third year through combining manufacturing operations
and reducing staff. Mr. Connolly said it was too early to say
whether the company would close specific plants.
Hillshire remains open to buying smaller companies that it can
easily fold into its current portfolio, Ms. Henry said on the
conference call.
--Ben Fox Rubin and Gillian Tan contributed to this article.
Write to Jacob Bunge at jacob.bunge@wsj.com and Annie Gasparro
at annie.gasparro@wsj.com
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