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Protein Focus! M&A Activity Heating Up in the Food Business

The Hedgeye Restaurants team posted a note earlier today on the impact of M&A deals between Hillshire Brands' (HSH), Pilgrim's Pride (PPC), and Pinnacle Foods (PF), which we've included below as it relates to the food industry.

 

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BOBE: M&A Activity Heating Up in the Food Business

 

Following Hillshire Brands’ (HSH) recent agreement to acquire Pinnacle Foods (PF) for about $4.3 billion, Pilgrim’s Pride (PPC) announced its proposal this morning to acquire HSH for $45.00 in cash.  The transaction, which is valued at $6.4 billion, places a 25% premium on the volume weighted average price of HSH shares over the 10 trading days following the announcement of the PF transaction.  In the deal, PPC would pay 12.5x TTM EBITDA for HSH.  According to the release, the proposal has the “unanimous support” of both Pilgrim’s and JBS SA’s Board of Directors.  PPC will finance the acquisition with a mix of existing cash and new debt financing.

 

Merging with HSH will allow PPC to expand its business in branded foods, an area that only makes up 20% of PPC’s current sales.  According to the release, the goal of the transaction is to create “a leading branded, protein-focused company with strong, consistent earnings and complementary competencies.”  HSH’s current brand portfolio consists of leading brands in core categories, including Jimmy Dean, Hillshire Farm, Ball Park, State Fair, Aidells and others.

 

This deal was of particular interest to us because it highlights the surging demand for packaged and prepared foods companies.  This ties directly into our Long BOBE Best Idea thesis, which calls for the spinoff or sale of BEF Foods that activist Sandell Asset Management first suggested.

 

In the case of BOBE, we see tremendous upside value in separating the foods business from the restaurant business and believe the company could spinoff BEF Foods at a substantial premium to its current value.

 

The food processing business is linked to the founding of the company and, to be clear, we fully appreciate the desire to maintain tradition within a business.  With that being said, we believe this connection is severely limiting the potential of the company.  Other than the historic connection between BEF Foods and Bob Evans Restaurants, there are very few, if any, synergies between the businesses.  We believe each business would benefit greatly from laser-focused, uncompromised operating strategies.  A separation would allow BOBE to focus on efficiently running its restaurants, while enabling BEF Foods to increase sales in the foodservice industry and further diversify its customer base.  As a separate entity, we believe BEF Foods would have an enormous runway for growth.

 

We maintain that such a transaction, in conjunction with significant SG&A cuts at BOBE, would result in substantial shareholder value creation for shareholders.

 

Protein Focus! M&A Activity Heating Up in the Food Business - bobe

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst



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Here’s the question-and-answer portion from our daily institutional Morning Call hosted by Hedgeye CEO Keith McCullough and macro analyst Christian Drake.

 


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BOBE: M&A Activity Heating Up in the Food Business

Following Hillshire Brands’ (HSH) recent agreement to acquire Pinnacle Foods (PF) for about $4.3 billion, Pilgrim’s Pride (PPC) announced its proposal this morning to acquire HSH for $45.00 in cash.  The transaction, which is valued at $6.4 billion, places a 25% premium on the volume weighted average price of HSH shares over the 10 trading days following the announcement of the PF transaction.  In the deal, PPC would pay 12.5x TTM EBITDA for HSH.  According to the release, the proposal has the “unanimous support” of both Pilgrim’s and JBS SA’s Board of Directors.  PPC will finance the acquisition with a mix of existing cash and new debt financing.

 

Merging with HSH will allow PPC to expand its business in branded foods, an area that only makes up 20% of PPC’s current sales.  According to the release, the goal of the transaction is to create “a leading branded, protein-focused company with strong, consistent earnings and complementary competencies.”  HSH’s current brand portfolio consists of leading brands in core categories, including Jimmy Dean, Hillshire Farm, Ball Park, State Fair, Aidells and others.

 

This deal was of particular interest to us because it highlights the surging demand for packaged and prepared foods companies.  This ties directly into our Long BOBE Best Idea thesis, which calls for the spinoff or sale of BEF Foods that activist Sandell Asset Management first suggested.

 

In the case of BOBE, we see tremendous upside value in separating the foods business from the restaurant business and believe the company could spinoff BEF Foods at a substantial premium to its current value.

 

The food processing business is linked to the founding of the company and, to be clear, we fully appreciate the desire to maintain tradition within a business.  With that being said, we believe this connection is severely limiting the potential of the company.  Other than the historic connection between BEF Foods and Bob Evans Restaurants, there are very few, if any, synergies between the businesses.  We believe each business would benefit greatly from laser-focused, uncompromised operating strategies.  A separation would allow BOBE to focus on efficiently running its restaurants, while enabling BEF Foods to increase sales in the foodservice industry and further diversify its customer base.  As a separate entity, we believe BEF Foods would have an enormous runway for growth.

 

We maintain that such a transaction, in conjunction with significant SG&A cuts at BOBE, would result in substantial shareholder value creation for shareholders.

 

We strongly encourage you to review our Best Idea Presentation, in which we run through the bull case on BOBE.

 

BOBE: M&A Activity Heating Up in the Food Business - chart1

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR

Takeaway: The market still keys off Case Shiller even though it's months behind Corelogic and walks you off the cliff at inflection points.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - Compendium 052714

 

Today's Focus: March S&P/Case-Shiller Home Price Report (& FHFA)

S&P released its monthly S&P/Case-Shiller home price report for March earlier this morning. It's important to remember that S&P/Case-Shiller is a rolling 3-month average repeat sales index, meaning that you're actually seeing the Jan/Feb/Mar timeframe represented equally in this data point. So, in essence, you're looking at February data.

 

By contrast, we've already seen April data from Corelogic. If you were to analyze Corelogic on a rolling 3-month basis and synchronize it with Case-Shiller you'd find a near perfect correlation. What this means is that Case-Shiller is a very lagging indicator, but it remains important if only because the market still takes its cues from the Case Shiller series (despite the shortcoming).  

 

In a nutshell, here's what Case Shiller had to say about home prices:

 

The non-seasonally adjusted Case-Shiller HPI slowed -50bps sequentially on YoY basis (+12.4% y/y in March vs +12.9% y/y in Feb) and continues to track Pending home sales nicely on an 18 month lag.  

 

Broken down by constituent cities, the upside pull in prices from the San Fran + Los Angeles heavyweights over the past year remains apparent (2nd chart below).  Of course, the drag goes both ways, and price growth is currently decelerating across LA, San Fran, and Las Vegas - and the comps get increasingly harder from here. 

 

Separately, we also received the FHFA home price data this morning. FHFA is the regulator that oversees Fannie Mae and Freddie Mac and it uses Fannie/Freddie data on conforming loans to compile a more middle-of-the-road home price index. The FHFA data showed the same trend of decelerating growth on a year-over-year basis. Specifically, FHFA showed March home prices were higher by 6.5% y/y vs +6.9% y/y in February.

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - Case Shiller vs Pending Home Sales 18Mo Lag

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - 20 City Scatterplot Index Weight vs TTM price growth

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - Case Shiller NSA YoY TTM

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - Case Shiller NSA Index Level LT

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - FHFA NSA YoY

 

CASE-SHILLER IS A SOLID LOOK IN THE REAR VIEW MIRROR - Case Shiller NSA MoM TTM 

 

 

About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.

 

Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.

 

Joshua Steiner, CFA

 

Christian B. Drake


Fund Flows, Refreshed

Takeaway: In the most recent five-day period, all equity mutual funds experienced net outflows versus all bond funds which captured net inflows.

Editor's Note: This research note was originally sent to subscribers on May 22, 2014 by Hedgeye’s Financials analyst Jonathan Casteleyn. Follow Jonathan on Twitter @HedgeyeJC.

 

Fund Flows, Refreshed - wallstreet2

 

ICI Mutual Fund Data and ETF Money Flow

In the most recent 5 day period, the combination of taxable and tax-free bond funds had another strong week of production with $3.9 billion in inflow, well above the running year-to-date average of $2.1 billion. Conversely, equity funds had only the third net outflow of the year with $1.0 billion leaving all equity mutual funds, well below the year-to-date average of a $3.1 billion inflow

 

Total equity mutual fund flows experienced only the third net outflow of 2014 with $1.0 billion being redeemed through a combination of domestic and international equity funds as reported by the Investment Company Institute (ICI). The culprit was the substantial $2.3 billion that came out of domestic stock funds which was slightly offset by the $1.2 billion inflow into international products for the week ending May 14th. Both equity categories were below the running 2014 weekly averages with the combined weekly mean for all equity products remaining a $3.1 billion inflow, now basically on par with the $3.1 billion weekly average inflow from 2013. 

 

Conversely, fixed income mutual fund flows continued on much strong footing for the week ending May 14th, with another solid $3.9 billion flowing into all fixed income funds. While this production was a slight deceleration from the $5.4 billion that came into bond products last week, the inflow into taxable products was the 14th consecutive week of positive flow and the inflow into municipal or tax-free products was the 18th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.1 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 

 

Exchange traded funds (ETFs) had positive trends on both sides of the ledger this week with a solid equity inflow complemented by a moderate inflow into bond exchange traded funds. Equity ETFs experienced a robust $9.6 billion inflow, while fixed income ETFs put up a $1.0 billion subscription. The 2014 weekly averages are now a $870 million weekly inflow for equity ETFs and a $1.0 billion weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $3.4 billion spread for the week ($8.5 billion of total equity inflow versus the $5.1 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.3 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Mutual fund flow data is collected weekly from the ICI and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. ETF information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

Fund Flows, Refreshed - ICI chart 1

Fund Flows, Refreshed - ICI chart 2

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product

 

Fund Flows, Refreshed - ICI chart 3

 

Fund Flows, Refreshed - ICI chart 4

 

Fund Flows, Refreshed - ICI chart 5

 

Fund Flows, Refreshed - ICI chart 6

 

Fund Flows, Refreshed - ICI chart 7

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds

 

Fund Flows, Refreshed - ICI chart 8

 

Fund Flows, Refreshed - ICI chart 9

 

Net Results

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $3.4 billion spread for the week ($8.5 billion of total equity inflow versus the $5.1 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.3 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Fund Flows, Refreshed - ICI chart 10 

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