DOJ Requires Upstream Divestiture in Tyson Foods’ Acquisition of Hillshire

The Department of Justice (“DOJ”) and the attorneys general of Illinois, Iowa, and Missouri allege that Tyson Foods, Inc.’s proposed acquisition of Hillshire Brands Company would diminish competition for the purchase of sows from farmers in the United States.1  Tyson Foods and Hillshire agreed to a settlement that requires Tyson Foods to divest its sow purchasing business, Heinold Hog Markets.  The proposed settlement demonstrates the importance of considering potential effect on both upstream suppliers and downstream customers when evaluating mergers and acquisitions.

Background

On July 1, 2014, Tyson Foods agreed to acquire Hillshire for approximately $8.55 billion.2  Tyson Foods produces, distributes, and markets chicken, meat and prepared foods.  Tyson Foods’ Heinold subsidiary buys and resells sows.  Farmers raise sows (i.e., female pigs) for the purpose of breeding hogs.  When sows can no longer breed, they are sold for slaughter to make sausage.  Farmers typically sell sows to marketers like Heinold, which then sell them to packers that make sausages.  In 2013, Heinold’s paid over $150 million to farmers in the US to purchase about 660,000 sows.3

Hillshire is a leading manufacturer and marketer of brand name food products, including Jimmy Dean sausages, Ballpark hot dogs, and Hillshire Farms luncheon meat.  Unlike most sausage packers, Hillshire buys sows from farmers directly instead of relying on marketers.  In 2013, Hillshire paid about $80 million to farmers in the US to purchase over 250,000 sows.4

Government Complaint

The DOJ and attorneys general allege that the proposed acquisition will lessen competition substantially between Tyson Foods and Hillshire in the US market for the purchase of sows.5  According to the DOJ, the proposed acquisition will combine two major sow purchasers and the combined company would account for approximately 35 percent of all purchasers in the market.6  As a result, the DOJ concluded that the acquisition would eliminate a significant customer for farmers’ sows, and farmers in the important agricultural market are entitled to competitive markets for their products.7

In an elaboration about the anticompetitive effects of the proposed acquisition, the complaint notes that for many farmers, the merging parties constitute their two best alternatives among the small number of potential buyers from whom these farmers seek or receive quotes.8  After the acquisition, bidding is likely to be less aggressive and the farmers will receive lower prices for their sows.9  As a result, farmers will have to ship sows to more distant purchasers, which will result in economic inefficiencies such as additional cost and shipping time.10

The government also alleges that the market has high barriers to entry and no potential entrants.  Packers do not purchase sows directly from farmers because they value the sorting and weighing services of marketers, and entry by new marketers or expansion by existing marketers is unlikely to be sufficient.11  The process of locating and acquiring land, obtaining permits, and constructing stations requires extensive time and would be unlikely to offset the loss of competition and decreased prices attributable to this acquisition.12

Proposed Final Judgment

At the same time as the complaint, the DOJ and attorneys general filed a proposed final judgment that requires Tyson Foods to divest Heinold to an acquirer acceptable to the DOJ, in its sole discretion after consultation with the co-plaintiff state attorneys general.13  In subsequent released statements, Tyson Foods announced that it agreed to the proposed settlement and the acquisition had been consummated.14  Until the divestiture is complete, Tyson Foods and Hillshire must comply with a Hold Separate Stipulation and Order, which requires Tyson Foods to run its sow purchasing business as an independent and competitively viable business, independent of influence from Hillshire.15

Key Take-Away

When analyzing a merger or acquisition, it is important to consider the transaction’s potential effects on both customers (downstream) and suppliers (upstream).16  Although it is unusual to see an enforcement action based on the likelihood of lower prices realized by suppliers due to alleged buyer power, requiring Tyson Foods to divest Heinold illustrates that the government is prepared to preserve competition in upstream markets, particularly in important sectors such as agriculture.  For example, in 2011, DOJ challenged an acquisition alleging that it would result in buyer power that may reduce the prices that poultry processors pay to chicken growers.17  Therefore, when analyzing a transaction, potential anticompetitive effects on both suppliers and customers should be evaluated.

Endnotes    (↵ returns to text)
  1. Press Release, U.S. Dep’t of Justice, Justice Department Requires Divestiture in Tyson Foods Inc. Acquisition of the Hillshire Brands Company (Aug. 27, 2014), available at http://www.justice.gov/atr/public/press_releases/2014/308299.pdf[hereinafter DOJ Press Release].
  2. Press Release, Tyson Foods, Inc., Tyson Foods and Hillshire Brands Announce Definitive Merger Agreement (July 2, 2014) available at http://ir.tyson.com/files/doc_news/Tyson%20HSH%20Press_release_FINAL_7-2-14.pdf.  The transaction value included Tyson Foods absorbing a $163 million break-up fee that Hillshire was required to pay regarding an aborted transaction with Pinnacle.  See Brianna Sacks, Los Angeles Times, Hillshire Takes Tyson Deal, Drops its own Bid for Pinnacle Foods (June 16, 2014) available athttp://www.latimes.com/business/la-fi-hillshire-tyson-20140616-story.html.
  3. Competitive Impact Statement at 5, United States, et al. v. Tyson Foods, Inc., et al., No. 1:14-cv-01474 (D.D.C. Aug. 27, 2014) [hereinafter Competitive Impact Statement].
  4. Id.
  5. Complaint at 2, United States, et al. v. Tyson Foods, Inc., et al., No. 1:14-cv-01474 (D.D.C. Aug. 27, 2014) [hereinafter Complaint].
  6. Id. at 6.  The government’s data indicates that the post-acquisition Herfindahl-Hirschman Index (HHI) will be approximately 2,100 points, an increase of more than 500 points.  Id.
  7. See DOJ Press Release.
  8. Complaint at 7.
  9. Id. at 7 – 8.
  10. Id. at 8.
  11. Id.
  12. Id.
  13. Proposed Final Judgment at 5, United States, et al. v. Tyson Foods, Inc., et al., No. 1:14-cv-01474 (D.D.C. Aug. 27, 2014).
  14. Press Release, Tyson Foods, Inc. and the Hillshire Brands Company, Tyson and Hillshire Brands Reach Agreement with Department of Justice (Aug. 27, 2014), available at http://ir.tyson.com/files/doc_news/TSN_HSH-082714_v001_c3q31j.pdf;   Press Release, Tyson Foods, Inc., Merger with Hillshire Moves Tyson Forward Faster (Sept. 4, 2014), available athttp://ir.tyson.com/files/doc_news/TSN_Barclays_Release_090414_v001_v9r2t3.pdf.
  15. Hold Separate Stipulation and Order at 6–9, United States, et al. v. Tyson Foods, Inc., et al., No. 1:14-cv-01474 (D.D.C. Aug. 27, 2014).
  16. See Competitive Impact Statement at n.2 (“Mergers of competing buyers can enhance market power on the buying side of a market, raising significant antitrust concerns.” (citing U.S. Dep’t of Justice and Federal Trade Comm’n, Horizontal Merger Guidelines (2010), §12.))
  17. See Press Release, U.S. Dep’t of Justice, Justice Department Files Antitrust Lawsuit Challenging George’s Inc.’s Acquisition of Tyson Foods Inc.’s Harrisonburg, Va. Poultry Processing Complex (May 10, 2011), available athttp://www.justice.gov/atr/public/press_releases/2011/270975.pdf.

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