Fitch: Affirms Tyson´s Ratings on Offer to Buy Hillshire

Chicago / IL. (fr) Fitch Ratings has affirmed the ratings of Tyson Foods Inc. following the firm´s unsolicited offer to acquire The Hillshire Brands Company. The Rating Outlook has been revised to Stable from Positive. Tyson´s ratings are as follows: Long-term Issuer Default Rating (IDR) «BBB»; Short-term IDR «F2»; Unsecured bank facility «BBB»; Senior unsecured notes «BBB». At March 29, 2014, Tyson had approximately 1,9 billion USD of total debt.

Key Rating Driver: Offer to Acquire Hillshire

The rating action is driven by Tyson´s offer today to acquire Hillshire for 50 USD per share or 6,8 billion USD including approximately 700 million USD of net debt. The price also includes 163 million USD to cover the termination fee payable to Pinnacle Foods Inc. (Pinnacle) if Tyson´s proposal is accepted. The transaction multiple is approximately 13,4x and represents a 35 percent premium to Hillshire´s stock price on May 09, 2014, the day prior to its announced agreement to acquire Pinnacle for 6,6 USD billion. Fitch will review Tyson´s ratings should there be a material change in the bid, which would prevent the company from reducing debt levels in a timely manner, as discussed below.

Fitch estimates that Tyson´s pro forma total debt-to-operating Ebitda, assuming 100 percent debt-financing, would be in the low 3,0x range but views Tyson´s willingness to issue equity in order to maintain investment grade favorably. For the LTM period ended March 29, 2014, Tyson´s total debt-to-operating Ebitda was 0,9x and Hillshire´s was 1,7x. Total adjusted debt-to-operating Ebitdar (defined as total debt plus 8x gross rent-to-operating Ebitda plus gross rent) was 1,5x for the period. Pro forma free cash flow (FCF) was 800 million USD.

The ratings affirmation and Stable Outlook reflect the current offer and Fitch´s expectation that leverage can decline to the low-to-mid-2,0x range within 12- 18 months of transaction closing. Tyson´s currently low leverage and significant cash flow generation from a combined Tyson/Hillshire entity should allow for rapid deleveraging.

Fitch views the potential acquisition of Hillshire as being in line with Tyson´s strategy of expanding in prepared foods and value-added products, further diversifying the company away from lower-margin commodity meats. Moreover, substantial supply chain and production-related synergies are anticipated given Tyson´s No. two position in U.S. pork production and the combined entities infrastructure in prepared foods. For the LTM period, Tyson´s operating Ebitda margin, as calculated by Fitch, was 6,2 percent while Hillshire´s was 13,8 percent. The proposed transaction should be immediately accretive to Tyson´s margins.

Key Rating Driver: Liquidity, Maturities and Debt Terms

At March 29, 2014, Tyson´s had approximately 1,4 billion USD of liquidity consisting of 438 million USD of cash and availability under an undrawn one billion USD unsecured revolver. Significant upcoming maturities are limited to 638 million USD of 6,6 percent senior unsecured notes due April 1, 2016. All of Hillshire´s unsecured notes, except the 6,125 percent notes due 2033, include a Change of Control Triggering Event provision. Fitch does not believe Tyson would be required to redeem Hillshire´s outstanding bonds if its bid is successful, given that the bond provisions require a downgrade to non-investment grade by all three agencies.

Tyson´s revolving facility expires Aug. 9, 2017. The facility is guaranteed by Tyson and its Tyson Fresh Meats (TFM) subsidiary as long as TFM guarantees the 638 million USD 2016 and one billion USD 2022 senior unsecured notes. The facility has a ratings-based collateral trigger or springing lien should Tyson´s corporate credit rating falls below a «BB+» or equivalent level. Tyson´s 120 million USD seven percent notes due 2018 and 18 million USD seven percent notes 2028 notes do not benefit from a TFM guarantee. Fitch does not delineate ratings based on these guarantees due to Tyson´s strong credit protection measures and low probability of default.

Financial maintenance covenants in Tyson´s credit facility include maximum adjusted debt-to-capitalization ratio of ,50 to 1,0 and minimum Ebitda-to-interest expense of 3,75x. The agreement also has a maximum total debt covenant of 3,5 billion USD. Fitch anticipates that Tyson´s credit facility would have to be amended to allow for the acquisition of Hillshire. However, Tyson currently has considerable room under these covenants. At March 29, 2014, total reported debt was 1,9 billion USD, and Fitch estimates that debt-to-capitalization was approximately 25 percent while adjusted Ebitda-to-interest was about 4x required levels.

Rating Sensitives

Future developments that may, individually or collectively, lead to a downgrade to «BBB-» include: A substantial increase in leverage where total debt-to-operating Ebitda is sustained above 2,5x due to a more aggressive financial strategy associated with debt-financed acquisitions, share repurchases, and/or a severe downturn in operating results.

Future developments that may, individually or collectively, lead to an upgrade to «BBB+» include: An upgrade is not anticipated in the near term given Tyson´s demonstrated willingness to engage in large-size acquisitions; Total debt-to-operating Ebitda sustained below 2,0x, with operating performance that is in line with Fitch´s expectations, at least one billion USD of liquidity, and continued generation of FCF that averages more than 500 million USD annually.

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