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Hillshire Brands Co (HSH)

Acquisition of Pinnacle Foods Conference Call

May 12, 2014 8:30 AM ET

Executives

Melissa Napier – Treasurer and Senior Vice President of Investor Relations

Sean Connolly – Chief Executive Officer

Maria Henry – Executive Vice President, Chief Financial Officer and Principal Accounting Officer

Analysts

Robert B. Moskow – Credit Suisse Securities

Kenneth B. Zaslow – BMO Capital Markets

Farha Aslam – Stephens Inc.

Andrew Lazar – Barclays Capital Inc.

Ken Goldman – JPMorgan

Robert Dickerson – Consumer Edge Research LLC

John J. Baumgartner – Wells Fargo Securities LLC

Akshay S. Jagdale – KeyBanc Capital Markets, Inc.

Priya Ohri Gupta – Barclays Capital Inc

Presentation

Operator

Good morning, and welcome to the Hillshire Brands Conference Call. Your lines have been placed in a listen-only mode. This conference is being recorded. If you have any objections, please disconnect at this time.

I would now like to turn the call over to Melissa Napier, Treasurer and Senior Vice President of Investor Relations for Hillshire Brands. Thank you, you may begin.

Melissa Napier

Thanks, Candy. Good morning everyone. Thanks for joining us on such short notice. I'm sure you saw our very exciting news that earlier this morning we announced that we have entered into an agreement to acquire Pinnacle Foods. Sean Connolly and Maria Henry, our CEO and CFO, will provide their perspectives on the deal, and will take your questions after our prepared remarks conclude.

I'll remind you that this call will contain forward-looking statements about the financial conditions, results of operations, and business of Hillshire and the combined businesses of Pinnacle and Hillshire, including the expected benefits of the proposed merger.

I also want to note that the proposed merger transaction will be submitted to a vote by Hillshire's and Pinnacle's shareholders. Hillshire will prepare a registration statement that will include a joint proxy statement prospectus to be filed with the SEC, and Hillshire and Pinnacle will mail it to their stockholders. We urge investors and stockholders to read the joint proxy statement prospectus when it becomes available, as well as other documents filed with the SEC, because they will contain important information.

Investors and security holders will be able to receive the registration statement containing the proxy statement prospectus and other documents at the SEC’s website or from Hillshire or Pinnacle.

And now I will turn the call over to Sean.

Sean Connolly

Thanks, Melissa. Good morning everybody, and thanks for calling in. It is an exciting day in the food industry as we continue to do what we set out to do two years ago, and that is to build a different kind of Food Company one that is simultaneously innovative and lean, and capable of delivering strong and consistent returns to our shareholders. Over the past two years, the progress we’ve made in strengthening our brands and taking out costs has been unmistakable.

Our growth rate has improved sequentially, and our OI margin has meaningfully increased, and has been above our targeted 10% over the past three quarters. And as we continue to advance our base business plans we also turned more of our attention to capital deployment where we raised our dividend 40% at the start of this fiscal, and have been aggressively advancing our M&A agenda.

And with respect to M&A today we are pleased to report that we’ve signed an agreement to acquire Pinnacle Foods in a deal we are confident will generate significant value for our shareholders. So, here are the key elements of the new Hillshire brands. The combination creates a nearly $7 billion company with iconic brands and leading positions across frozen, refrigerated, and dry grocery categories. It unites two strongly performing and highly complementary companies that are demonstrating a commitment to both brand building and a lean cost structure. So culturally, the companies are very similar. Third, the acquisition will deliver enhanced scale, capabilities, and margins, along with input cost diversification.

Importantly, the financial impact is highly compelling, as the deal is expected to unlock immediate accretion and significant cost synergies, as well as meaningful new revenue opportunities. Finally, the strong combined cash flows will enable continued investment to support growth and drive long-term shareholder returns. So, overall this is a highly attractive combination.

Let me walk you through some of the key facts on the deal. On structure and consideration this is a $6.6 billion transaction in cash and stock. The effective EBITDA multiple is $9.6 million after considering synergies and other benefits. And the implied purchase price represents an 18% premium. And in terms of financial benefits, the deal is immediately accretive to EPS in year one, and delivers robust accretion number by year three.

Contributing to that is the $140 million in cost synergies we expect to deliver by the end of that third year. Importantly, the acquisition is also margin accretive and opens up broader revenue opportunities for both companies, and we like the fact that it diversifies our input cost basket. I'll elaborate on each of these points momentarily.

In terms of timing and shareholder support, we expect the deal to close by September, subject to regulatory and shareholder approvals. And clearly Blackstone, Pinnacle’s largest shareholder, who owns 51% of the company, is committed to voting its shares in favor of the transaction. Lastly, the company will continue to be called Hillshire Brands be located in Chicago, and I will continue on as CEO.

Today, Pinnacle is a $2.6 billion company with iconic brands that span frozen and center store, with a very small specialty business that includes food service. Importantly, the Pinnacle management team has done an excellent job shedding weak performers from this portfolio, driving strong productivity and revitalizing iconic brands like Bird’s Eye, which creates a terrific platform from which to build.

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