Fitch Ratings has assigned a 'BBB' rating to Tyson Foods, Inc.'s (Tyson;
NYSE:TSN) $3.25 billion senior unsecured notes offering. Proceeds from
the offering will be used to partially finance the company's previously
announced $8.6 billion acquisition of The Hillshire Brands Company
(Hillshire, 'BBB/F2'/Stable Outlook), discussed below. Tyson is expected
to issue the notes in multiple tranches.
The new senior unsecured notes will be issued under the firm's indenture
dated June 1, 1995 and will rank pari passu with Tyson's existing
unsecured debt. The notes will also be guaranteed on a senior unsecured
basis by Tyson Fresh Meats Inc. and contain a change of control
provision. This provision conveys to the holder the right to require
Tyson to repurchase the notes at a price equal to 101% of the aggregate
principal amount plus accrued and unpaid interest to the date of
repurchase upon a change of control and ratings downgrades below
investment grade by two of three rating agencies.
KEY RATING DRIVERS
Transaction Financing, Divestiture Proceeds, Deleveraging Plans
Tyson's ratings reflect the company's deleveraging plans and the
estimated $2.4 billion of equity issued to partially finance the
Hillshire acquisition. Fitch expects total debt-to-EBITDA to decline to
between 2.0x and 2.5x within two years of the transaction closing, which
is expected to occur by Sept. 27, 2014, due to debt reduction and EBITDA
growth. Tyson plans to use net proceeds from the recently announced sale
of its poultry businesses in Mexico and Brazil for $575 million to pay
down debt. Moreover, Fitch's baseline projection is that Tyson will
generate at least $600 million of annualized free cash flow (FCF)
following its acquisition of Hillshire.
Pro Forma Capital Structure, Equity Offerings
Financing for Hillshire consists of approximately $6 billion of debt and
$2.4 billion of equity. The debt portion of the financing includes $2.5
billion of unsecured term loans, $3.25 billion of senior notes, and
about $205 million of senior amortizing notes associated with tangible
equity units (TEUs). Pro forma leverage, based on March 2014 data and
roughly $8.9 billion of total debt, is 3.2x.
On July 30, 2014, Tyson announced that it priced public offerings for 24
million shares of its class A common stock and 30 million TEUs. Net
proceeds from the common stock issuance, assuming no over-allotment,
totaled $873 million (or $1 billion with the full 3.6 million
over-allotment option). The TEUs, which are composed of a prepaid stock
purchase contract and a senior amortizing note, were sold at $50 per
unit for net proceeds of $1.5 billion. The TEUs would get substantial
Hillshire Acquisition Complementary, Provides Significant Synergies
Fitch views the pending acquisition of Hillshire as in line with Tyson's
strategy of expanding in prepared foods and value-added products and
expects the purchase to be accretive to margins. Tyson's prepared foods
operating margin was 1.3% for the nine months ended June 28, 2014,
excluding a $49 million impairment charge related to the closure of
three plants. Results were well below current normalized expectations of
4%-6% as performance has been impacted negatively by higher raw
materials and investments in growth platforms. Hillshire's operating
margin for the LTM period ended March 29, 2014 was roughly 10%.
Tyson expects more than $225 million of operational, purchasing, and
distribution synergies from combining its prepared foods business with
Hillshire in fiscal 2015. The firm increased total projected synergies
to at least $500 million within three years, up from its original
estimate of $300 million. Fitch views the realization of synergies and
anticipated margin expansion combined with debt reduction as key rating
factors for Tyson. The company plans to provide a new normalized range
for prepared foods after the Hillshire transaction closes.
Earnings Remain Strong
Fiscal 2014 will mark the fifth consecutive year of strong operating
performance for Tyson. For the nine-months ended June 28, 2014,
operating earnings increased 17% versus prior year to $1.1 billion
inclusive of $49 million of impairment. Operating income saw a 2.5% rise
in consolidated sales volumes, an average price increase of 5.4%, and a
$460 million decline in feed costs. Operating margins in chicken, pork,
and beef were 8.2%, 7.6%, and 1.7%, respectively.
Tyson expects fiscal 2015 to be another strong year. Feed costs are
projected to decline $400 million in 2015, after declining $500 million
in fiscal 2014, and overall protein demand is projected to remain
robust. Tyson's guidance includes operating margins at or above 10% for
chicken and within the 6%-8% normalized range for pork. Profitability
for beef is expected to be similar to levels in 2014 and to improve by
$50 million in the international segment due to better pricing. Tyson
began reporting international results separately in the second quarter
of fiscal 2014. The segment will consist of chicken operations in China
and India following the divestiture of operations in Mexico and Brazil.
Liquidity, Maturities and Debt Terms
Tyson's liquidity at June 28, 2014 consisted of $587 million of cash and
availability under a $1 billion unsecured revolver, which Fitch believes
was undrawn. Significant upcoming maturities are limited to $638 million
of 6.6% senior unsecured notes due April 1, 2016. All of Hillshire's
unsecured notes, except the 6.125% notes due 2033, include a change of
control triggering event provision. Tyson will not have to redeem
Hillshire's outstanding bonds, 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 2016 and $1 billion 2022 senior
unsecured notes. Tyson's $120 million 7% notes due 2018 and $18 million
7% notes due 2028 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.
On June 27, 2014, Tyson amended its credit agreement to allow for the
acquisition of Hillshire. Changes included, among other things, the
elimination of certain limitations related to the incurrence of debt and
increasing the maximum debt-to-capitalization from 50% to 65% through
the first full quarter following the closing of the Hillshire
transaction and 60% thereafter. The previous ratings-based collateral
trigger was eliminated and a priority debt basket of 15% of consolidated
net tangible assets was added. Fitch estimates that
debt-to-capitalization was approximately 21% at June 28, 2014.
Positive: Future developments that may, individually or collectively,
lead to an upgrade include:
--An upgrade is not likely in the next 12-18 months due to the
meaningful increased leverage following the acquisition of Hillshire and
potential integration risk.
However, factors that could lead to a rating upgrade include:
--Realization of $500 million or more of expected synergies;
--100 bps or more of EBITDA margin expansion;
--Annualized FCF averaging around $800 million over time;
--Greater than expected debt reduction and operating income growth such
that total debt-to-operating EBITDA is sustainable at around 2x or lower;
--The maintenance of $1 billion or more of liquidity.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Weak top-line growth or significant margin contraction due to
prolonged supply or demand imbalances resulting from animal diseases or
higher feed cost and substantially lower than expected FCF such that
total debt-to-operating EBITDA is sustained above approximately 2.5x;
--Additional material size acquisitions over the near term or aggressive
financial policies relating to dividends and share repurchases would be
Tyson's ratings are as follows:
--Long-term Issuer Default Rating (IDR) 'BBB';
--Unsecured bank facility 'BBB';
--Senior unsecured notes 'BBB';
--Short-term IDR 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology including Short-term Ratings and Parent
and Subsidiary Linkage ' (May 2014);
--'Fitch Affirms Tyson's IDRs at 'BBB/F2'; Expects to Rate $3.25B Notes
'BBB'; Outlook Stable' (July 2014);
--'Fitch Rates Tyson's $2.5 billion Term Loans 'BBB'' (July 2014);
--'Fitch: Tyson's Ratings Currently Unaffected by Conclusion of Bidding'
--'Fitch Affirms Tyson's Ratings on Offer to Buy Hillshire; Outlook
Revised to Stable' (May 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
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Carla Norfleet Taylor, CFA
70 W. Madison Street
Chicago, IL 60602
Wesley E. Moultrie II, CPA
Brian Bertsch, New York, +1-212-908-0549
Source: Fitch Ratings