April 25, 2017 / 6:16 PM / 7 months ago

Tyson makes shareholders tasty $3.2 bln sandwich

NEW YORK (Reuters Breakingviews) - Tyson Foods has found a delectable new bite to swallow in its quest to become America’s premier protein provider from the farmyard to the kitchen table. Its $3.2 billion purchase of ready-to-eat sandwich maker AdvancePierre takes the Springdale, Arkansas-based poultry company further up the food value chain. Along with plans to carve off some less wholesome morsels, Tyson is giving investors plenty to cluck about.

Tyson food meat products are shown in this photo illustration in Encinitas, California May 29, 2014. REUTERS/Mike Blake

The country’s largest producer of broiler chickens, Tyson had already been reducing its dependence on the volatile commodity meat business. In 2014, for example, it forked out $8.5 billion for Hillshire Brands, another prepared-foods producer. AdvancePierre, whose forerunner Tyson owned briefly after acquiring meat producer Hudson Foods in 1997, is more digestible.

It’s also pretty juicy. The Cincinnati-based outfit, which gets two-thirds of its revenue from selling sandwiches through food-service companies and convenience stores, had an EBITDA margin of 15.9 percent last year, well above Tyson’s 9.4 percent.

The new owner is paying up for the privilege, forking over a $770 million, or 32 percent, premium to AdvancePierre’s share price before talk of a deal first surfaced earlier this month. That’s more than covered by the $200 million of fat Tyson expects to trim. Once taxed and capitalized, those are currently worth $1.4 billion to shareholders.

Granted, at 14 percent of its target’s costs, Tyson is being pretty aggressive. But even reducing overheads by a more standard 10 percent ought still to justify the price. Tyson also plans to put off any share buybacks for around two years to reduce debt and on Monday said it might sell three non-protein brands, including Sara Lee Frozen Bakery.

Oaktree Capital Management is the one really taking the cake. The investment company gained control of Pierre Foods in 2008 by investing $100 million in its distressed debt and then merged it with four rivals. After last year’s $390 million initial public offering, another sale of stock in January and the $1.3 billion it’ll get from Tuesday’s sale, Oaktree’s internal rate of return, excluding any dividends, is an impressive 39 percent. That’s a well-served dish.


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