Lack of data is problematic for meat sector

A battle for control of a key meat processor is unfolding in the US and it has features that should be analysed by those engaged in meat production closer to home.

The takeover war is for a company named Hillshire Brands, which produces branded meat products and has a turnover of $4bn (€2.9bn). It has leading market shares in sausages, lunchmeat, and hotdogs. Almost 90% of its output is branded and 75% of production is sold through retail outlets, with the remainder distributed via food service channels.

Hillshire was about to acquire another US food company — Pinnacle Foods — for $6.6bn but has now become the subject of two bids from Pilgrims Pride and Tyson Foods. Pilgrim bid $6.4bn and Tyson has offered $6.8bn for Hillshire, with speculation growing that further bids could arise. The bids are a 35%-plus premium to the share price of Hillshire just one month ago.

This large scale bidding war is driven by the range of branded products within Hillshire that offer less volatility than commodity meat production. Pilgrim and Tyson are large poultry, beef, and pork producers, and want to smooth their profit performance by having more stable brand earnings within their business.

The valuation being placed on Hillshire is eye-popping, at 14.5 times earnings before interest tax, depreciation, and amortisation. In my years as a food industry analyst, such earnings multiples rarely exceeded eight times. Furthermore, margins in the US food processing sector are at cyclical peaks presently, so these bids are high-octane offers.

The interesting contrast between the US and Irish meat processing sectors relates to their ownership structures. In the US, all four companies involved in this takeover battle are quoted on the stockmarket.

In Ireland, none of the primary meat processors are listed on the exchange.

Some branded meat products exist within companies such as Kerry and Aryzta, but the bulk of meat processing exists inside privately owned companies who do not release detailed annual reports.

The experience of stockmarket listed companies in Irish meat is a poor one. Kerry failed with its prolonged efforts to manage a beef and pigmeat processing business while Avonmore Foods (the precursor to Glanbia) exited pigmeat and lamb processing after years of under-performance. It seems the Irish industry struggles to produce the returns needed to satisfy institutional investors.

This is not a healthy scenario for a sector which the Government wants to contribute growth to a recovering economy. Harvest 2020 envisages a 20% uplift in beef output. Such expansion requires larger processing capital expenditure and undoubted investment in product development and brands.

That investment cannot rely largely on debt financing if it is to create sustainable long-term value. Building an equity finance component to the industry’s expansion will be critical.

This US flurry &is a timely reminder to Ireland that its industry has some unusual characteristics. In the US, a fully transparent and public analysis of the meat sector is possible as these companies have heavy disclosure requirements. That allows a financial debate about the state of the sector and its ability to fund needed investment in products and brands.

In Ireland, this debate is restricted as the data on how our meat industry performs financially is not publicly available. For a sector that forms at least one key pillar of critical importance to the future of the economy, the absence of detailed financial analysis and a stockmarket route to equity finance seem like weaknesses that need to be addressed.

Joe Gill is director of corporate broking with Goodbody Capital Markets. His views are personal.