The Chicago-based company, which makes Hillshire Farm lunch meats, Jimmy Dean sausages and Ball Park franks, said Monday that it would buy Pinnacle Foods in a deal valued at $4.23 billion. The move extends Hillshire's reach into other sections of the supermarket as more Americans watch how much meat they're eating.
Among Pinnacle's other brands are Wish-Bone salad dressing, Celeste frozen pizzas and Vlasic pickles.
“Meats go with vegetables, sandwiches go with pickles,” Hillshire CEO Sean Connolly said in explaining why the deal made sense during a conference call with analysts.
In a phone interview, Connolly noted that Americans are eating meat just as often, but less of it per meal. He said that actually benefits Hillshire because foods that incorporate different ingredients [--] such as its Jimmy Dean breakfast sandwiches [--] are more profitable than simpler items like lunchmeats or sausages.
“We've often said we like products that are more than just meat,” Connolly said.
Hillshire, which has been struggling with weak sales, also said last month that it was buying Van's Natural Foods, which makes gluten-free products including cereal, chips and snack bars.
Given its reduced reliance on meat, the new Hillshire is expected to have significantly higher profit margins. Rising prices for meat have hurt Hillshire's profit margins and led the company to increase prices in stores.
Still, some of Pinnacle's brands such as Hungry-Man are seen as having an outdated image at a time when many people are trying to move away from foods they feel are processed or unhealthy. On Tuesday, the frozen food industry even plans to launch its first TV ad defending the nutritional benefits of its products.
When asked whether Hillshire plans to hold onto all of Pinnacle's products, Connolly said it was “too early to tell,” but noted Hillshire's record of focusing on its strongest brands. He added that Birds Eye, which has a more health-conscious image, was particularly attractive to Hillshire when evaluating the deal.
In a note to investors about the acquisition, J.P. Morgan analyst Ken Goldman declared the “strategic rationale unclear.”
“Although we can see some logic behind the combination of lunchmeat and pickles, along with waffles and syrup, the connections seem a bit thinner than what we hope for in most food transactions,” he wrote.
Connolly declined to specify the scope of the layoffs expected as a result of the acquisition. But he noted that the deal should generate $140 million in annual savings from consolidated manufacturing and other overhead costs.
Each share of Parsippany, New Jersey-based Pinnacle Foods Inc. common stock will be exchanged for $18 in cash and 0.5 shares of Hillshire Brands Co. common stock. The companies said the implied purchase price is $36.02 per share, an 18 percent premium to Pinnacle's Friday closing price.
Including Pinnacle's outstanding debt, they put the deal's total value at about $6.6 billion.
The combined company will use the Hillshire Brands name and be based in Chicago. Connolly will serve as its president and CEO.
Both companies' boards unanimously approved the acquisition, which is expected to close by September. It still needs shareholder approval. The companies said investment firm Blackstone, which owns a 51 percent stake of Pinnacle's outstanding stock, agreed to the deal.
Hillshire anticipates that it will maintain its annual dividend of 70 cents per share and suspend a previously announced stock repurchase program.
Pinnacle's shares rose 15 percent to $34.92 and Hillshire's shares fell 6 percent to $34.82.
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