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ConAgra (CAG) is on our Hedgeye Consumer Staples Best Ideas list as a LONG.  

 

Treehouse Foods announced today that they have signed a definitive agreement to buy ConAgra’s Private Label food business for $2.7bn. Although the effort to sell the business was widely known, the price that CAG would eventually receive was a cause for concern. This price was obviously plenty to please investors as the stock is up approximately ~5% in premarket trading at the time of this note. Selling Private Brands is an important step in the right direction for CAG, as they work to right size their portfolio. Getting rid of the Private Brands business will allow their team to focus on branded foods, which carry a much higher margin.

CAG will be divesting the vast majority of their private brands business, only retaining certain operations that are directly tied with their branded business. With the $2.7bn CAG will use the majority of it to pay down debt. Additionally, following the transaction, CAG expects to have a capital loss carryforward of approximately $4.2bn with an approximate tax value of $1.6bn. This can be used to offset potential future capital gains over the next five years.

With the dead weight detached and a lower debt profile CAG is going to be on the hunt for an acquisition. With the lessons they learned on the failed acquisition of Private Brands, they will be smarter and more calculated on their next move. Will they decide to stick to the frozen aisle and acquire within their domain, or venture out and get into the popular world of snacking? There are plenty of possible acquisitions within both aisles and we look forward to seeing where they go next.

HISTORICAL NOTES

CAG | IN THE BEGINNING

CAG | GOING LONG

Please call or e-mail with any questions.

Howard Penney

Managing Director

Shayne Laidlaw

Analyst