Did Tyson Destroy Itself in the Hillshire Buyout?

Credit Suisse’s Robert Moskow has downgraded Tyson to Underperform from Neutral. The firm also downgraded its price target to $35 from $40 in the call. The rational for this downgrade is that the price paid just does not make sense to most investors.

Moskow further warned of a transaction risk as well. He noted that if the stock market continues to react negatively to the deal, or if fundamentals decline in the core business, Tyson may need to issue even more stock to complete the transaction. Tyson shares fell 6% on Monday, followed by another 4% drop as of mid-afternoon on Tuesday.

Tuesday’s report identifies the reason that Tyson is paying so much as being that management views this as a once-in-a-lifetime transformational deal that can mute the volatility in its core business. Management also believes that this will accelerate Tyson’s growth rate, improve its value-added mix, create synergies and cost savings and ultimately allow Tyson’s stock to trade at a higher valuation multiple over time.

The analyst said:

We certainly see how Tyson’s offer to acquire Hillshire Brands at a 70% premium can create value for investors if they have a seven, ten, or twenty-year investment horizon. Unfortunately, most investors don’t have the luxury of investing with such a long-term view. We believe Tyson stock will be dead money at best for the next 12 months as it copes with the hangover of paying such a big price including an issuance of perhaps $1.6 billion of equity.

Moskow identified four major concerns:

• To win Hillshire, Tyson had to win a bidding war, and how could Tyson win this asset without overpaying for it?
• Tyson might not be desperate to do a deal, but it certainly sounds desperate.
• The only way to make this transaction work financially is to achieve massive cost synergies through SG&A cuts and supply chain productivity.
• Sensitivity to chicken still will be a factor.

Tyson shares were down 4.1% at $35.95 in mid-afternoon trading on Tuesday. Its 52-week range is $24.74 to $44.24, and the consensus price target from analysts is $44.50. Needless to say, Credit Suisse’s $35 price target is among the worst price targets that analysts have.

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