ConAgra Foods seeks to create value

by Keith Nunes
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ConAgra products, Slim Jim, Marie Callendar's, Lamb Weston
ConAgra plans to break the company up into two independent, publicly-traded companies.

OMAHA — When Sean Connolly took control of ConAgra Foods as CEO this past April he said his management team would be proactive and open-minded about evaluating different paths to creating value. With the Nov. 18 announcement the company plans to spin off its Lamb Weston business, which follows the company’s recent announcement it is selling its Private Brands business unit to TreeHouse Foods, it appears Connolly has chosen the path he wants to follow. What remains to be seen is whether the endeavor will create the value he has been promising.

The details of the transaction are straight forward — ConAgra plans to break the company up into two independent, publicly-traded companies. One will be called ConAgra Brands and consist of ConAgra Foods’ consumer brand businesses. The second business will be called Lamb Weston and be made up of the company’s frozen potato assets.

 

Sean Connolly, CEO of ConAgra Foods
Sean Connolly, president and CEO of ConAgra Foods

“Today’s announcement is another meaningful step in the journey we first spoke to you about in June,” Connolly said in a conference call with financial analysts Nov. 18. “From the outset we have been clear that tremendous change was needed at ConAgra Foods and that with discipline, speed, and a willingness to take bold actions on a number of fronts there was meaningful value to be created.

“Ultimately, our decision to separate these businesses is about unlocking value. We believe that by separating Lamb Weston from our retail business we can better highlight the strong standalone potential of each. This separation best positions ConAgra Brands and Lamb Weston to compete, grow, and win, while maximizing long-term value for shareholders.”

The separation is expected to take place in the fall of 2016 and once spun off, Lamb Weston will consist of a portfolio of frozen potato, sweet potato, appetizer, and other vegetable products and retain its diversified presence in retail frozen potato products under its combination of licensed brands and private brands. For fiscal 2015, Lamb Weston generated revenues of approximately $2.9 billion.

The Consumer Brands business will have sales approaching $9 billion, according to the company. The figure excludes any contribution from the Ardent Mills joint venture. The new business will feature such brands as Marie Callender’s, Healthy Choice, Slim Jim and more. It also will include the Spicetec Flavors & Seasoning business as well as JM Swank.

In the conference call with financial analysts shortly after the announcement, Connolly only offered few specifics about how separating the consumer packaged goods business of ConAgra Foods and Lamb Weston will benefit both companies, beyond management’s ability to remain focused.

Akshay Jagdale, an analyst with KeyBanc Capital Markets, asked Connolly to provide specific examples of any shared functions that the two businesses that being separated were using.

ConAgra brands, Marie Calendar, Healthy Choice, Chef Boyardee, Reddi-Wip
A research analyst with Credit Suisse said ConAgra may be looking to sell Lamb Weston.

“Because the way I understand it they were pretty separate in terms of go-to-market and even on the supply chain side,” Jagdale said. “I understand that asset is undervalued so it makes sense, but just from your plan of executing better on the consumer brands, how does this transaction make that happen better or faster?”

Connolly said he is “absolutely convinced” the consumer business as a pure play company will have enhanced focus.

“We will have an accelerated improvement in our capabilities in a number of areas, everything from growth orientation around brand building and innovation to cost savings and efficiency and customer focus,” he said. “So you will have a management team here that is squarely focused on one thing, which is enhancing the operational performance of that ConAgra Brands business, which has not been the case. As we do have shared resources currently, we do have management spreading their time and energy out across a number of things, so we believe the pure-play nature of this will contribute meaningfully to the enhanced performance of it.”

Robert Moskow, a research analyst with Credit Suisse, wrote in a research note shortly after the call that other issues may be at play.

“(ConAgra’s) stated intention is to launch Lamb Weston as a public company to current ConAgra shareholders in a tax-free fashion,” he wrote. “However, the long amount of time shareholders will have to wait for the spin (as much as 12 months) suggests that management is pursuing a parallel path that willingly entertains a bid from a strategic acquirer. Post and Tyson Foods strike us as the most likely candidates to make a bid for Lamb Weston, if they haven’t already.”

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