ConAgra Foods (CAG) announced in November that it was spinning off Lamb Weston, its business unit focused on frozen potatoes. Yes, frozen potatoes. It sounds funny, but ConAgra is cleaning out the cupboard following a disastrous and ill-advised acquisition of Ralcorp a few years ago and the recent arrival of new CEO Sean Connolly. That decision was “assisted” by Jana Partners, an activist investor that owns 7% of the stock. But those expecting the Lamb Weston spinoff to happen in Fall 2016, as announced, might be disappointed.
That’s not to say that Lamb Weston won’t be separated. I’m convinced it will be. But the timing of this spinoff announcement suggests that ConAgra has already tried to shop its potatoes unit and was unable to receive a price it wanted. As part of ConAgra’s strategic review, Connolly examined which units he wanted to keep and which to jettison, with a little help from his friends at Jana, no doubt. The company is looking to re-focus on its core branded consumer packaged goods such as Chef Boyardee, Hunt’s, and Reddi Wip, and shifting away from its foodservice potatoes business (Lamb Weston) and private label (Ralcorp), which it severely mismanaged.
The first to be taken off the auction block successfully was the remnants of Ralcorp, which makes private-label goods for supermarkets. In a deal announced in early November, Treehouse Foods (TREE) took Ralcorp off ConAgra’s hands for $2.7 billion, much less than the $5 billion ConAgra paid for it just three years ago in a lustful binge. That’s even less than the $3.7 billion estimated by Citigroup in June. The Treehouse deal was announced just a couple weeks before ConAgra declared it was spinning off Lamb Weston. Crain’s has an excellent rundown on the Treehouse deal.
That new cash from Treehouse will help ConAgra, soon to be rebranded as Conagra Brands, to pay down debt. But the company is also looking to expand by buying brands in growth areas such as “organic, natural, and premium gourmet”, according to Connolly in a June conference call. And for that move, it would certainly like more cash.
So I conclude that after ConAgra couldn’t get a price it wanted for Lamb Weston, it announced a spinoff, perhaps as a negotiating position to get a hesitant buyer to act. Combine this with the small size of the company, sales of just $2.9 billion, and it won’t be surprising if a buyer emerges. It would be an easy swallow for private equity or for a larger company in the sector. Even if that doesn’t happen before the spinoff, it’s still a possibility after the spin, given Lamb Weston’s relatively small size.
Lamb Weston has a decent business, though margins are not as attractive as the core ConAgra unit’s. But the spinoff should allow management to get costs aligned at the business, re-invest in its most attractive segments, and participate in the long-term trend of consumers dining out more, both in the US and globally. You can find further details on the transactions on our Upcoming Spinoffs page, which includes the detailed ConAgra press release as well as the investor presentation. We’ll have the Lamb Weston prospectus as soon as it becomes available.
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