Fitch Affirms Tyson's Ratings on Offer to Buy Hillshire; Outlook Revised to Stable

Fitch Ratings has affirmed the ratings of Tyson Foods, Inc. (Tyson; NYSE: TSN) following the firm's unsolicited offer to acquire The Hillshire Brands Co. (Hillshire; NYSE: HSH). The Rating Outlook has been revised to Stable from Positive.

Tyson's ratings are as follows:

--Long-term Issuer Default Rating (IDR) 'BBB';

--Short-term IDR 'F2';

--Unsecured bank facility 'BBB';

--Senior unsecured notes 'BBB'.

At March 29, 2014, Tyson had approximately $1.9 billion of total debt.

Key Rating Drivers:

Offer to Acquire Hillshire

The rating action is driven by Tyson's offer today to acquire Hillshire for $50 per share or $6.8 billion including approximately $700 million of net debt. The price also includes $163 million to cover the termination fee payable to Pinnacle Foods, Inc. (Pinnacle) if Tyson's proposal is accepted. The transaction multiple is approximately 13.4x and represents a 35% premium to Hillshire's stock price on May 9, 2014, the day prior to its announced agreement to acquire Pinnacle for $6.6 billion. Fitch will review Tyson's ratings should there be a material change in the bid, which would prevent the company from reducing debt levels in a timely manner, as discussed below.

Fitch estimates that Tyson's pro forma total debt-to-operating EBITDA, assuming 100% debt-financing, would be in the low 3.0x range but views Tyson's willingness to issue equity in order to maintain investment grade favorably. For the LTM period ended March 29, 2014, Tyson's total debt-to-operating EBITDA was 0.9x and Hillshire's was 1.7x. Total adjusted debt-to-operating EBITDAR (defined as total debt plus 8x gross rent-to-operating EBITDA plus gross rent) was 1.5x for the period. Pro forma free cash flow (FCF) was $800 million.

The ratings affirmation and Stable Outlook reflect the current offer and Fitch's expectation that leverage can decline to the low-to-mid-2.0x range within 12- 18 months of transaction closing. Tyson's currently low leverage and significant cash flow generation from a combined Tyson/Hillshire entity should allow for rapid deleveraging.

Fitch views the potential acquisition of Hillshire as being in line with Tyson's strategy of expanding in prepared foods and value-added products, further diversifying the company away from lower-margin commodity meats. Moreover, substantial supply chain and production-related synergies are anticipated given Tyson's No. 2 position in U.S. pork production and the combined entities infrastructure in prepared foods. For the LTM period, Tyson's operating EBITDA margin, as calculated by Fitch, was 6.2% while Hillshire's was 13.8%. The proposed transaction should be immediately accretive to Tyson's margins.

Liquidity, Maturities and Debt Terms

At March 29, 2014, Tyson's had approximately $1.4 billion of liquidity consisting of $438 million of cash and availability under an undrawn $1 billion unsecured revolver. 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. Fitch does not believe Tyson would be required to redeem Hillshire's outstanding bonds if its bid is successful, 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. The facility has a ratings-based collateral trigger or springing lien should Tyson's corporate credit rating falls below a 'BB+' or equivalent level. Tyson's $120 million 7% notes due 2018 and $18 million 7% notes 2028 notes 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.

Financial maintenance covenants in Tyson's credit facility include maximum adjusted debt-to-capitalization ratio of .50 to 1.0 and minimum EBITDA-to-interest expense of 3.75x. The agreement also has a maximum total debt covenant of $3.5 billion. Fitch anticipates that Tyson's credit facility would have to be amended to allow for the acquisition of Hillshire. However, Tyson currently has considerable room under these covenants. At March 29, 2014, total reported debt was $1.9 billion, and Fitch estimates that debt-to-capitalization was approximately 25% while adjusted EBITDA-to-interest was about 4x required levels.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a downgrade to 'BBB-' include:

--A substantial increase in leverage where total debt-to-operating EBITDA is sustained above 2.5x due to a more aggressive financial strategy associated with debt-financed acquisitions, share repurchases, and/or a severe downturn in operating results.

Future developments that may, individually or collectively, lead to an upgrade to 'BBB+' include:

--An upgrade is not anticipated in the near term given Tyson's demonstrated willingness to engage in large-size acquisitions;

--Total debt-to-operating EBITDA sustained below 2.0x, with operating performance that is in line with Fitch's expectations, at least $1 billion of liquidity, and continued generation of FCF that averages more than $500 million annually.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 2014);

--Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure (August 2013);

--Fitch Revises Hillshire's Ratings to Watch Evolving After Takeover Bids (May 2014)

--Fitch Downgrades Hillshire to 'BB' on Acquisition Announcement; Places Ratings on Negative Watch (May 2014);

--Fitch Views Pilgrim's Pride Takeover Bid for Hillshire as Neutral to JBS' Credit Quality (May 2014);

--Fitch Upgrades Tyson's S-T IDR to 'F2' and Affirms L-T IDR at BBB; Outlook Positive (January 2014)

Applicable Criteria and Related Research:

Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832211

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