Morningstar | Tyson's Keystone Deal Creates International Opportunities but Doesn't Materially Alter Our Outlook
No-moat Tyson's $2.2 billion cash purchase of Keystone Foods from Marfrig Global Foods should not alter our $67 fair value estimate much. While we think the deal creates international growth potential, we do not anticipate it will meaningfully change our low-single-digit top-line growth and high-single-digit adjusted operating margin expectations for the next decade. We believe Tyson's shares trade fairly.Valued at about 10 times trailing adjusted EBITDA (8 times including synergies), the deal should boost Tyson's international standing, as 35% of the target's $2.5 billion in revenue (in total, about 6% of Tyson's estimated fiscal 2018 take) comes from non-U.S. markets. Keystone has plants in China, Thailand, Australia, Malaysia, and South Korea serving a portfolio that caters mostly to food-service clients and will add to Tyson's relationships with global restaurant chains, in our view. The purchased assets, which focus on prepared chicken products, should help Tyson diversify its sales mix globally; about 12% of fiscal 2017 sales came from international markets. While the deal raises key customer concentration--Keystone is a major chicken nugget supplier for McDonald's--we anticipate the combination will offer new opportunities to sell a broader range of Tyson's offerings to such large accounts while creating avenues for Keystone to leverage Tyson's client roster.
Still, we do not expect the deal to much change Tyson's ability to generate economic returns. Keystone produces value-added products, but such items are still hard to differentiate, limiting pricing power. While it's certainly not egregious, we see the multiple paid as somewhat high, given the limited synergy potential; management expects $50 million in run-rate savings by the third year after the expected fiscal mid-2019 close. The deal does not alter our view that Tyson doesn't benefit from a sustainable competitive edge, nor should it lead us to change our Standard stewardship rating.
Tyson Foods is a food company. The company's operations consist of breeding stock, contract farmers, feed production, processing, further-processing, marketing and transportation of chicken and related allied products, including animal and pet food ingredients. Through its wholly-owned subsidiary, Cobb-Vantress, Inc., the company is engaged as poultry breeding stock supplier. The company also processes live fed cattle and hogs and fabricates dressed beef and pork carcasses into primal and sub-primal meat cuts, case-ready beef and pork and fully-cooked meats. The company produces a range of fresh, frozen and refrigerated food products. The company operates in Beef, Pork, Chicken and Prepared Foods segments.
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