Fitch Affirms Tyson's IDRs at 'BBB/F2'; Expects to Rate $3.25B Notes 'BBB'; Outlook Stable

Fitch Ratings has affirmed the credit ratings assigned to Tyson Foods, Inc. (Tyson; NYSE: TSN). In addition, Fitch expects to assign a 'BBB' rating to $3.25 billion of proposed senior unsecured notes. Fitch affirms the following:

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

--Unsecured bank facility at 'BBB';

--Senior unsecured notes at 'BBB';

--Short-term IDR at 'F2'

The Rating Outlook is Stable.

At June 28, 2014, Tyson had approximately $1.8 billion of total debt, consisting mainly of senior unsecured notes maturing 2016 through 2028.

KEY RATING DRIVERS

Ratings Affirmation

The affirmation of Tyson's ratings reflects Tyson's deleveraging plans and the estimated $2.5 billion of equity being issued to partially finance the firm's $8.6 billion acquisition of The Hillshire Brands Co. (Hillshire; IDRs rated 'BBB/F2' by Fitch). Fitch expects total debt-to-EBITDA to decline to between 2.0x and 2.5x within two years of 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, Deleveraging Anticipated

On July 28, 2014, Tyson published financial information pro forma for the purchase of Hillshire. Financing is expected to consist of approximately $6 billion of debt and $2.5 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 $220 million of senior amortizing notes associated with the TEUs. Pro forma leverage, based on March 2014 data and roughly $8.9 billion of total debt, is 3.2x.

Tyson simultaneously commenced public offerings for 24 million shares, plus a 3.6 million over-allotment option, of its class A common stock and 30 million tangible equity units (TEU). Based on Tyson's July 25 closing stock price, proceeds from the common stock issuance, assuming no over-allotment, will total $949 million. The TEUs, which are composed of a prepaid stock purchase contract and a senior amortizing note, will be sold at $50 per unit for total projected proceeds of $1.5 billion. The TEUs would get substantial equity treatment.

Proposed Issuance of $3.25 billion of Multi-Tranche Notes

Tyson also filed a registration statement for the issuance of debt securities associated with Hillshire acquisition on July 28. The firm intends to issue $3.25 billion aggregate 5-year, 10-year, and 30-year fixed rate notes with an assumed weighted average interest rate of 3.91%. 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.

Hillshire Is Complementary and 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 negatively impacted 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, 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. Tyson 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 month period ended June 28, 2014, operating earnings increased 17% versus prior year to $1.1 billion inclusive of $49 million of impairment charges related to the closure of three plants. Operating income was positively impacted by 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. As previously mentioned, prepared foods segment operating margin was 1.3% excluding plant closure impairment charges.

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 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.

RATING SENSITIVITIES

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 increase 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 viewed negatively.

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 Rates Tyson's $2.5 billion Term Loans 'BBB'' (July 2014);

--'Fitch: Tyson's Ratings Currently Unaffected by Conclusion of Bidding' (June 2014);

--'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

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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=842794

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