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Skepticism Abounds That Hillshire-Pinnacle Deal Will Wrap

NEW YORK (The Deal) -- The $4.2 billion merger of Pinnacle Foods (PF) with Hillshire Brands (HSH) is trading at a wide spread on belief the buyer is a target.

Blackstone Group-backed Pinnacle is being acquired by Hillshire for $18 in cash and 0.5 of a Hillshire share for each share of Pinnacle. The deal traded at a spread of $2.95 Thursday after closing Monday after the merger announcement at $1.41. Prior to the deal announcement, the relative value of the companies based on the deal terms translated to a spread of $6. If the merger closes at the end of August, based on the current spread, it offers an annualized return of about 30%.

The merger has no regulatory risks. The key concern is that Hillshire is itself a takeover target and risk arbitrageurs playing the deal could be caught short Hillshire if a spoiler bid surfaces.

Thursday, Citadel Advisors LLC filed on a 5% stake in Hillshire. That filing came under form 13G, not a 13D, which could lean against the notion that activists could agitate against the Hillshire tie-up with Pinnacle. But the Citadel filing underscores the presence of potentially activist investors in a Hillshire that could be present on the assumption that the buyer in the Pinnacle merger was an expected target. Citadel declined to comment on its filing.

Other Hillshire shareholders include York Capital Management LLC, with 3.7%, , Gamco with 3.7%, Wellington Management Co., with 3.6%, DE Shaw & Co., 2%, Carlson Capital LP, with 1.2%, Eminence Capital LLC, with 1.1%.

A potential bid for Hillshire has been suspected and a number of funds are in the stock for that outcome, an arb said.

The merger requires the approval of Hillshire shareholders and includes a break up fee of $163 million, or about $1.33 per share for Hillshire shares if another offer prevailed.

The Pinnacle vote is secured because Blackstone Group LP has 51% of the target and is committed to backing the transaction.

Some of the funds in Hillshire are there because the company was considered a takeover target and any of a number could take a lead in voicing opposition to the Pinnacle merger.

On the merger announcement, Hillshire defended the deal and its purchase price relative to Pinnacle's sales based on potential cost savings and expected growth in the core Pinnacle brands.

Citadel is a Pinnacle Foods shareholder, as well, with about 2.6%, so it may well support the merger, an arb said. The deal has a strategic logic, but the roll-out was received with some disappointment, the arb said. Hillshire's going to have some time before a proxy filing to sell it to shareholders and until that process is underway, view the deal with caution, he said.

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