How Profitable Will Conagra Foods' Spinoff Be?

How profitable will ConAgra Foods' spinoff be?

By Barbara Soderlin / World-Herald staff writer  November’s ConAgra Spinoff is plating up to be one of the better spinoffs of 2016  The Edge sees multiple M&A activity post Lamb Weston break-up

ConAgra Foods’ spinoff of its frozen potato business into a stand-alone company could shape up to be one of the year’s most lucrative spinoff deals, one analyst told The World- Herald.

But others are skeptical about whether the two companies will fare much better on their own than they have together, and about how quickly shareholders could see a gain.

Either way, the deal will sharpen the focus on the remaining ConAgra business, with its motley crew of grocery store food brands, and will put to the test Chief Executive Sean Connolly’s vision to break up the formerly Omaha-based food manufacturer.

Shareholders and analysts will be looking for clues today in the first of two investor presentations. Executives of the future Lamb Weston stand-alone potato business will lay out the most detailed information yet about the new company’s corporate structure, spending priorities and growth plans. A second presentation Oct. 18 will give the same details on the remaining — and renamed — Conagra Brands business so investors can evaluate each business on its own merits. The spinoff is another major step in Connolly’s plan to boost value for ConAgra shareholders by cutting costs and breaking the company into pieces, freeing up resources to focus on a core business of grocery store food brands like Slim Jim and Marie

Callender’s.

The spinoff comes after he sold ConAgra’s private-label food business to a competitor, laid off 1,000 people in Omaha and moved ConAgra’s headquarters to Chicago.

ConAgra now will split apart its potato business — a maker of McDonald’s french fries — from its consumer food brand business, saying that on its own, each company will be more focused, more flexible and better- positioned for success.

ConAgra shareholders will receive one Lamb Weston share for every three shares of ConAgra stock owned as of Nov. 1. Shares will be distributed Nov. 9.

The new Conagra Brands will trade on the New York Stock Exchange under the company’s current symbol, CAG. Lamb Weston shares also are expected be listed on the NYSE, under the symbol LW. Lamb Weston will be based in Eagle, Idaho, a Boise suburb. Its biggest customer is McDonald’s, with about 12 percent of sales. One firm that studies spinoff deals has been telling clients to buy ConAgra shares now, before the spin, and to hang on to both companies’ shares after the spin. ConAgra has already been a “winner” for clients, said Jonathan Morgan, a deals

analyst and partner at the Edge Group, a New York firm that studies spinoffs.

ConAgra stock is up about 12 percent so far this year, compared with about 5 percent for the broader stock market. “From what we know as of now, this is plating up to be one of the better spinoffs this year.”Lamb Weston is a “really good business,” Morgan said, with strong operating profit margins and plenty of cash. Commercial food sales — mostly the Lamb Weston business — represented about 32 percent of total ConAgra sales in the first quarter of its 2017 fiscal year.

But Conagra Brands, too, will be under strong management and has more gains ahead if it sells other assets and invests in its plans to reinvigorate its branded food business, Morgan said.

Returns on spun-off companies so far in 2016 are outperforming the broader index, according to Chicago- based Spin-Off Research. But that’s no guarantee of success. Four in 10 spinoffs produce negative returns in their first year, according to a study the Edge conducted with accounting firm Deloitte. Another 40 percent see returns of more than 20 percent in their first year.

Will Lamb Weston join the list of successes? The idea behind the spinoff makes sense, but any increase in value may already be built into ConAgra’s stock price, said Joanna Makris, analyst for the Spin-Off Report at New York firm PCS Research Services. “What is the next catalyst for the stock? It’s real performance,” she said. Conagra Brands will have a strong balance sheet with little debt and will be able to invest for growth, she said. That could mean developing new products and buying new, premium brands, like the recent purchase, for $109 million, of Chicago food businesses Frontera Foods and Red Fork. In the spinoff, Lamb Weston will incur $2.38 billion in debt to pass cash back to its parent company, according to company filings and analysts. That’s one way a company can pull money out of a spinoff. That is not a worrisome debt level for Lamb Weston, Makris said. She said Lamb Weston, as a higher-margin, higher-growth business, should see “healthy investor interest” as that company works to build its international business. Lamb Weston is seeing growing U.S. sales as more Americans eat at restaurants, and it says it has significant opportunity to expand overseas as fast-food chains expand. Spin-Off Research, the Chicago firm, said it expects Conagra Brands to use proceeds from the spinoff to boost its dividend or buy back shares. It values the current ConAgra Foods business at $21.1 billion, or $48.30 per share. It values the future Conagra Brands at $15.3 billion, or $35 per share, and the future Lamb Weston at $4.3 billion, or $29 per share.

Investment bank Jefferies reiterated its buy rating for ConAgra Wednesday, with a price target of $56. ConAgra stock closed at $47.22 a share Wednesday, up about 0.5 percent on the day. Jefferies analyst Akshay Jagdale said he expects executives to offer conservative growth estimates, but he believes the companies’ assets are undervalued and that the spinoff could help unlock $14 billion in value. For the Conagra Brands business, he projects flat to low single-digit sales growth, but double-digit earnings growth in the next couple of years. There are risks, though, Jagdale and other analysts point out. He mentioned volatility in the cost of the commodities that are the raw materials of food manufacturing. Also, Conagra may not sell as many assets as expected.

Finally, ConAgra’s packaged food business is risky these days, with what Jagdale called high exposure to “center-store” categories — the nonperishable and frozen foods many consumers are no longer as excited about buying. There’s also the perception that many of ConAgra’s brands are “value brands,” targeted at the kind of consumers who buy on price, not quality, Credit Suisse analyst Robert Moskow said during a Sept. 29 conference call with ConAgra executives. Citi Research analyst David Driscoll said he is concerned that the two businesses might be less efficient on their own, now that they won’t be sharing back-office functions.

Executives downplayed those concerns, with Connolly telling analysts to tune in to today’s presentation: “We are confident you will see the unique opportunities available to both companies and why each is well- positioned to seize them.” [email protected], 402-444-1336

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