JBS SA (JBSS3)’s decision to boost its offer for Hillshire Brands Co. (HSH:US) by 20 percent is unnerving bond investors as a bidding war imperils the creditworthiness of the world’s biggest meat producer.
Sao Paulo-based JBS’s $1 billion of bonds due 2020 fell to the lowest in four weeks yesterday after the company’s Pilgrim’s Pride Corp. (PPC:US) unit raised its unsolicited bid for Hillshire to $6.7 billion to top an offer by Tyson Foods Inc.
The move comes after Moody’s Investors Service, which already put JBS’s Ba3 rating on review for downgrade, warned the takeover would have negative implications following a $5.6 billion bid from Pilgrim’s last week. After spending $17 billion on acquisitions in the past decade to overtake Tyson, JBS’s $55-a-share offer would push its leverage to a four-year high of five times, according to Votorantim Corretora.
“As a bond investor, bidding wars are not necessarily something that one gets happy about,” Ian McCall, a money manager at Geneva-based Quesnell Capital SA, said in a telephone interview. “It’s not as if JBS is a small company. It’s already a big company, and as creditors we generally don’t benefit from big companies deciding to get even bigger.”
The bonds fell to 106.9 cents on the dollar, pushing yields to 6.22 percent, after Pilgrim’s topped Springdale, Arkansas-based Tyson’s $50-a-share offer yesterday.
The notes already yield 0.84 percentage point more than the average for emerging-market corporate bonds that share their BB credit rating from Standard & Poor’s, data compiled by Bloomberg and Bank of America Corp. show.
Pilgrim’s said it expects cost savings from the proposed deal to exceed $300 million annually, and that the purchase would boost earnings per share immediately.
Jeremiah O’Callaghan, investor relations director at JBS, declined to comment further.
“The confirmation of the acquisition as proposed would contribute to the maintenance of JBS’ negative rating outlook, as it incorporates our expectations that credit metrics, particularly leverage, would continue momentarily pressured,” Moody’s said in a May 29 report.
Brazil’s real lost 0.2 percent today to 2.2848 per dollar as of 12:49 p.m. in New York.
JBS’s net debt to earnings before interest, taxes, depreciation and amortization would jump to the highest since the second quarter of 2010 based on its first-quarter data, from a current 3.4 times, Votorantim said.
The Sao Paulo-based brokerage estimates that every $1-per-share increase in the proposal would require an extra $120 million in cash.
“This is too high, and JBS bondholders are probably not happy,” Revisson Bonfim, the head of global emerging-markets analysis at Sterne, Agee & Leach, said in a telephone interview from New York. “Even with the synergies, it’s risking a downgrade to JBS’s ratings if they are successful. If they were to go on, it would be very negative.’
Tyson is likely to boost its offer for Hillshire as it seeks to expand into higher-margin consumer brands and processed foods, according to Ken Shea, an analyst for Bloomberg Industries.
‘‘Tyson still has some financial ammunition,” Shea said in a telephone interview from Skillman, New Jersey. “This is one asset both companies are willing to stretch for. The market certainly thinks that Tyson is going to respond higher.”
Hillshire shares climbed 1.2 percent to $59.33 in New York today, above what Pilgrim’s offered, indicating investors expect a higher bid. The shares have jumped 31 percent (HSH:US) since May 27 to the highest level since 1998.
Chicago-based Hillshire, the maker of Jimmy Dean sausages, said yesterday that it’s not making any recommendation regarding either of the competing proposals, and it won’t withdraw its planned acquisition of Pinnacle Foods Inc., a condition of both the Tyson and Pilgrim’s offers earlier.
“When does someone come in and say, ‘This is too expensive and doesn’t make sense anymore?’” said Bonfim at Sterne, Agee & Leach. “If they lose, it’s better for the bondholders.”
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