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Tyson Foods may tap debt market soon
admin | February 8, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Back to back acquisitions and refinancing needs could lead Tyson to tap the debt market for up to $3 billion. While Tyson is not a very liquid credit, secondary spreads could widen ahead of a new deal. Any widening in existing bonds, particularly the 2027 and 2047 issues, provides an attractive entry point given their below par prices, relatively large sizes of $1.35 billion and $750 million, and greater liquidity relative to the rest of the capital structure.
Tyson announces another acquisition
Tyson Foods’ (TSN) fiscal 1Q19 results were overshadowed by the company’s announcement that it will be acquiring processing facilities in Thailand, the Netherlands and the UK from BRF SA for $340 million. The news comes on the heels of the Keystone Foods acquisition for $2.16 billion, which closed on 11/30/18. TSN has been using acquisitions to grow its presence in the prepared foods space, which is less volatile and provides for better margins than the processing business. Coupled with the previous acquisitions of Hillshire Brands and AdvancePierre Foods, TSN has grown the prepared foods business from $4 billion in sales with a 1% return to a business that is expected to generate $8 billion in sales, an 11%-12% return and roughly $1 billion in operating income. Given the back to back acquisitions, management noted that they are fully committed to integrating the latest two acquisitions and will take a structured and disciplined approach to any further acquisitions.
Debt issuance coming soon
The $1.8 billion term loan used to finance the Keystone acquisition contains a mandatory prepayment covenant that requires 100% of net cash proceeds from any asset sale, debt issuance or equity issuance to prepay the loan. Tyson is likely to tap the debt market for at least the $1.8 billion term loan plus the $340 million needed to close BRF SA facilities acquisition. The company is also expected to refinance a large portion of the $1.3 billion of debt maturing in 2019, bringing total projected issuance to $3 billion. Management has yet to make a decision on to refinance the maturities, but it might be easier to add to the expected issuance given the current strength of the investment grade market.
Committed to current ratings
Management remains committed to its IG ratings, a 2.0x net leverage target and minimum liquidity of $1.0 billion. TSN ended 1Q19 with net leverage of 2.8x. The BRF SA acquisition will bring net leverage up slightly to 2.9x. Management can bring that leverage metric down this year via debt reduction and cash build on the balance sheet. While TSN remains balanced with respect to shareholder remuneration and debt reduction, management will dial back share repurchases after acquisitions to provide more cash for debt reduction. On a last twelve months’ basis, Tyson returned 55% of the $1.48 billion of free cash flow it generated to shareholders. The dividend, while growing, consumed $457 million while share repurchases totaled $346 million. Company management repurchased $83 million worth of shares in fiscal 1Q19, which is down roughly 50% from the year-ago period.
Relative value
Despite the back to back acquisitions, this does not mark a change in acquisition appetite or financial policy, and the company’s mid BBB and P2/A2 commercial paper ratings are intact. While Tyson is not a very liquid credit, secondary spreads could widen ahead of a new deal. Depending on the size of the deal, Tyson could issue debt across the curve. Any widening in existing bonds, particularly the 2027 and 2047 issues, provides an attractive entry point given their below par prices, relatively large size of $1.35 billion and $750 million, respectively, and greater liquidity relative to the rest of the capital structure.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
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