CAG | SMOOTH MOVES

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

 

Today CAG announced their intentions to separate their business into two independent publicly traded companies. One will be comprised of their branded business named, ConAgra Brands, and the other consisting of their foodservice portfolio which is largely their frozen potato business called Lamb Weston.

THE TRANSACTION

The spin-off will be tax free to both the company and its shareholders. After the transaction current CAG shareholders will own 100% of both ConAgra Brands and Lamb Weston. Management is currently targeting to complete the transaction in the fall of 2016, subject to final approval by the Company’s Board of Directors, other customary approvals and receipt of an opinion from tax counsel on the tax-free nature of the spin-off.

 

This transaction coupled with the sale of the private brands business and the previously announced $300 million efficiency plan have CAG headed in the right direction. The steps that CAG have taken in such a short time period really demonstrate that this management team and Board are prepared to act on anything that creates long-term shareholder value.

CONAGRA BRANDS

The new company, called ConAgra Brands, will primarily consist of the branded business, currently reported as the Company’s Consumer Food segment, which generated approximately $7.2bn in fiscal year 2015. In addition ConAgra Brands will absorb some foodservice operations and certain private label products, which generated about $1.8bn in fiscal year 2015. ConAgra Brands is also expected to retain the company’s stake in the Ardent Mills joint venture

 

ConAgra Brands will focus on strengthening their branded position on the shelf while driving innovation and improving margins. They will be flexible in their ability to pursue acquisitions and possibly divest brands as well. In addition the new company intends to maintain an investment grade credit rating. Sean Connolly will be CEO and it will be headquartered in Chicago.

LAMB WESTON

Lamb Weston’s portfolio will consist of frozen potato, sweet potato, appetizers and other vegetable products, as well as a continued presence in retail frozen products under licensed brands and private label. In fiscal year 2015 Lamb Weston generated $2.9bn in revenue.

 

Management team and capital structure will be announced at a later date.

HEDGEYE OPINION

We view the separation of these two businesses as a large positive for the creation of long-term value. But we do question the reasoning behind the spin-off of Lamb Weston versus an outright sale of the business. The decision most likely came down to tax implications, it is our assumption that the sale of Lamb Weston would have created a large tax leakage, which is what made this route the best. As two public companies, the respective management teams will have greater focus on their respective goals which will lead to improved performance. The newly created ConAgra Brands will be predominately branded with a lesser private label and foodservice division. We expect to see management stay active on the M&A front within ConAgra brands, divesting non-core assets while acquiring more appealing brands.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst