Demand for meat in emerging markets, which spurred the biggest proposed Chinese takeover of a U.S. company, is turning American producers such as Hillshire Brands Co. (HSH:US) and Sanderson Farms Inc. (SAFM:US) into potential acquisition targets.
Hillshire offers buyers a higher free cash flow yield than 97 percent of similar-sized U.S. food manufacturers, while the price-earnings ratio at Sanderson is cheaper than 92 percent of the group, according to data compiled by Bloomberg. Their valuations have reached potentially alluring levels at a time when Brazilian and Chinese companies are the dominant buyers of U.S. meat producers and have accounted for 92 percent of global transactions in the past five years, the data show.
Shuanghui International Holdings Ltd.’s $7 billion deal last month to buy Smithfield Foods Inc. (SFD:US) will prompt other large meat companies from China, Brazil and Russia to evaluate U.S. targets, said Greg Pearlman, a Chicago-based managing director at Bank of Montreal. Smithfield’s sale underscores the appeal of U.S. meat processors, meaning Hillshire, Sanderson and Hormel (HRL:US) Foods Corp. could lure international buyers looking for high quality, safe food, Gimme Credit LLC said.
“There are a lot of appealing targets that could come into play,” Vicki Bryan, a New York-based analyst at Gimme Credit, said in a telephone interview. “We are at the beginning of what could be a burgeoning trend.”
Mike Cummins, a spokesman for Chicago-based Hillshire, and Rick Williamson of Austin, Minnesota-based Hormel declined to comment. Sanderson Chief Financial Officer Mike Cockrell declined to comment on acquisitions involving his Laurel, Mississippi-based company, while adding he wouldn’t be surprised to see more U.S. meat companies purchased by foreign buyers.
For buyers, Hillshire provides the second-largest share of the North American chilled processed food market, according to Euromonitor International. Sanderson is the third-largest U.S. chicken producer, and Spam maker Hormel is the No. 5 U.S. pork processor, data compiled by Tyson (TSN:US) Foods Inc. show.
Brazilian and Chinese buyers accounted for $21.9 billion of the $24 billion in industry deals announced worldwide since June 2008, fueled by a growing middle class that’s eating more meat, according to data compiled by Bloomberg.
That’s a shift from the prior five years, when U.S. companies were the biggest acquirers as $9.2 billion in transactions were announced, the data show. In both periods, American producers made up almost half the targets, in terms of the dollar value of transactions.
Foreign companies are probably examining potential deals right now because the ability of overseas acquirers to execute transactions has matured, said Mark Walsh, the Boston-based lead of Deloitte Consulting LLP’s U.S. mergers, acquisitions and restructuring practice.
“Commodities are certainly in play,” Walsh said in a phone interview. “This is an area of focus over the next 12 to 24 months. Depending on how the next couple transactions play out, you may see an uptick or this kind of dynamic go away for a while.”
The cross-border deals highlight the demand for U.S. meat supplies and expertise in food safety and technology as well as a shift in purchasing power, Smithfield Chief Executive Officer C. Larry Pope said. China’s per capita pork consumption has risen 22 percent in the past decade as chicken consumption increased 35 percent.
“It speaks to where some of the economic and financial wherewithal in the world has moved,” Pope said in a phone interview. “We are in a global environment. Buyers are not just in the U.S. There’s an awful lot of money in Asia and an awful lot of money in Brazil.”
Shuanghui’s deal for Smithfield is being reviewed by the Committee on Foreign Investment in the U.S. and the Department of Justice. Foreign companies are watching how much of the U.S. meat industry regulators are willing to put in foreign hands, Gimme Credit’s Bryan said.
Thailand’s Charoen Pokphand Foods Pcl (CPF) and Brazil’s JBS SA (JBSS3) - - both of which considered buying Smithfield, people familiar with the matter told Bloomberg News last month -- may seek to buy other U.S. meat processors, Bryan said. COFCO Corp., the Chinese agricultural trader and processor that sold its 7-million-share Smithfield stake back to the company in November, may also seek an American target, she said.
Officials at CP Foods declined to comment. Yin Jianhao, a spokesman at Beijing-based COFCO, couldn’t be reached on his mobile phone for comment on the company’s acquisition outlook.
The CEO of JBS said during an interview this week that, following the $2.7 billion acquisition of processing plants and a tannery unit from Marfrig Alimentos SA (MRFG3), the company will seek to cut costs for the moment.
“We’re not in the market to buy anything else,” the CEO, Wesley Batista, said at JBS’s headquarters in Sao Paulo.
JBS expressed interest in Sara Lee Corp., which was Hillshire’s name before spinning off its tea and coffee unit last year, according to people with knowledge of the negotiations at the time who asked not to be named because the discussions were private.
BRF SA (BRFS3), Latin America’s largest food manufacturer by market value, plans to expand internationally, Chairman Abilio Diniz said in April. Hormel may meet the Sao Paulo-based company’s needs, said Frederico de Castro, an analyst at Perfin Investimentos, which manages 2.8 billion reais ($1.3 billion) of stock, including BRF shares.
“Hormel is a good company, very well managed,” the analyst said of the $10.5 billion company. “They have a strong brand, good margins, good distribution. They would totally make sense for BRF.”
Hillshire, which is valued at $4.1 billion, may also appeal to BRF, though the odds of U.S.-based companies such as Tyson or Hormel acquiring it are greater, said Alexia Howard, a New York-based analyst for Sanford C. Bernstein & Co.
Representatives for BRF didn’t respond to requests for comment.
Hillshire’s free cash flow yield (HSH:US), a measure of how much cash from operations a business generates relative to its share price, is 8.7 percent -- better than all but one peer, according to data compiled by Bloomberg. The median among U.S. food manufacturers valued at more than $500 million is 4 percent, the data show.
As income levels and food demand climb in emerging markets, Tyson would offer a “one-stop shop for an international buyer,” according to Brett Hundley, a Richmond, Virginia-based analyst at BB&T Corp. The largest U.S. chicken and beef producer would be an attractive target both operationally and in terms of its valuation, he said.
The $9.1 billion company is the cheapest in the U.S. food manufacturing industry, according to data compiled by Bloomberg. Even with Tyson shares up 33 percent (TSN:US) this year, the company’s enterprise value is 6.5 times its profit (TSN:US) in the last 12 months, the lowest multiple among U.S. food manufacturers valued at more than $500 million, the data show.
Still, regulatory filings show that the Tyson family controls (TSN:US) more than 70 percent of the stock’s voting power, giving them the ability to block deals, Hundley said.
“What it all boils down to is, is the family willing to sell?” Hundley said. “I’m sure they have a price in their mind where they would be willing to sell. We just don’t know what it is.”
Gary Mickelson, a spokesman for Springdale, Arkansas-based Tyson, declined to comment on the acquisition prospects for his company or other U.S. meat companies.
Sanderson may be a more willing seller because there is no obvious family successor to CEO Joe Sanderson Jr., whose father was one of the company’s co-founders, Hundley said. Sanderson trades at about 13 times this year’s projected earnings, cheaper than 92 percent of peers, according to data compiled by Bloomberg.
Today, Hillshire shares added 0.2 percent to $33.20, breaking a four-day losing streak. Sanderson slumped 1.6 percent to $68.88, while Hormel rose 0.8 percent to $40.13 for the third-best performance in the Standard & Poor’s 500 Consumer Staples Index. Tyson fell 0.6 percent to $25.56.
U.S. companies are “logical” targets because they are efficient livestock producers and over the last 30 years have worked on improving yields without sacrificing quality, said Joe Grendys, CEO of closely held Koch Foods Inc. He said his company plans to remain independent and hasn’t been approached by acquirers.
The U.S. is “light years ahead of the rest of the world in terms of production,” Grendys said.
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