Americas Financing Package, US Loan and US Structured Equity Issue: Tyson Foods' US$9.2bn acquisition financing
Tyson Foods pulled out all the stops in its pursuit of Hillshire Brands, eventually carrying the day with a US$8.55bn offer, but the battle was a genuine food fight. The series of transactions that made the acquisition possible become IFR’s Americas Financing Package, US Loan and US Structured Equity Issue of the Year.
They say it’s best not to know how sausages are made, but buying up the companies that make them can be just about as messy.
In the case of Tyson Foods’ purchase of Hillshire Brands, the world’s second-largest US meat processor first had to fend off a rival campaign by Pilgrim’s Pride, majority-owned by Brazil’s JBS – the world’s largest.
Hillshire laid down terms for an intensely competitive three-stage bidding process. The end result? Tyson paid US$63 per share – or a whopping 16.8 times Ebitda – for the company.
That was far more aggressive than its previous offer of US$50 per share, or a 13.4 times multiple.
“We expected some intense bidding,” said Tyson Foods CFO Dennis Leatherby. “We were comfortable our US$63 bid would result in an accretive, game-changing acquisition for our company.”
To make that kind of offer possible, though, Tyson needed a complicated US$9.2bn financing that could achieve many goals at once. Leverage had to be capped to keep Tyson (rated Baa3/BBB/BBB) at investment grade. The family ownership stake meant equity dilution had to be kept to a minimum. Looking to further deals down the road, the company didn’t want to be tied up by restrictive covenants.
But perhaps most important of all, the Tyson offer came backed by a fully underwritten US$8.2bn one-year financing led by Morgan Stanley and JP Morgan. The company also had a US$1bn 364-day revolver backstop. The Pilgrim’s Pride offer did not have committed financing.
After the bid was won, that US$9.2bn package was soon sold down through equity, bond and loan transactions.
“We decided to structure this financing in a way that we could maintain our IG ratings, have flexibility in terms of operating covenants, access cheap cost of capital and, on top of that, very quickly be in a position to make more acquisitions and/or start buying back some stock not too long after this transaction,” said Leatherby.
The solution came in the form of a US$2.4bn equity trade split into both mandatory convertible (tangible equity) and common equity pieces, which helped strike a balance between share dilution and credit ratings.
“We issued straight common but put more weight on tangible equity units, based on our view that our stock would be trading at more than the 25% conversion premium in three years, which minimises dilution,” said Leatherby.
The TEUs comprised a three-year forward purchase and an amortising note with the same tenor. The security received “more than” 80% equity treatment from Moody’s, higher than the 50% the agency typically ascribes to the more conventional mandatory unit structure of a three-year forward with five-year debt.
Pricing on the mandatory was fixed at a 4.75% dividend and 25% conversion premium, through the aggressive ends of 4.25%–4.75% and 17.5%–22.5% price talk. Tyson management – eight directors and officers, including chairman John Tyson – purchased roughly US$38m of the mandatory.
The company then embarked on a US$3.2bn issue of unsecured five, 10, 20 and 30-year bonds. It received more than US$20bn of demand before aggressive spread tightening from initial price thoughts brought books down to US$18bn.
“Overall we were extremely pleased by these transactions, because our weighted average interest cost across the whole range of debt we issued was just 3.01%,” the CFO said. “And we achieved our other structural goals to position us well for the future.”
The company expects synergies to total more than US$225m by September 2015 and over US$500m in 2017. It plans to reduce leverage to two times within a year from three times currently, on a pro forma basis.
“It is remarkable that within a year of completing such a large acquisition, we would be in a position to add on more leverage again to fund growth opportunities or buy back stock, without worrying about restrictive covenants or jeopardising our IG ratings,” said Leatherby.
“We saw an opportunity to go back to our previous strategy around our existing business, expand greatly in retail through Hillshire, with number one shares in many categories, and generate considerable combined savings through synergies – which gave us the confidence to compete on price.”