Glenboden M & A Originations

ConAgra should sell its commercial foods division

Priority Rating priority rating 4
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Origination Status market rumours, June 2015
Asset Commercial foods division of ConAgra, focused on foodservice
Buyer candidates ijnclude Permira, Lion Capital, Blackstone
Seller ConAgra Foods Inc (USA), leading domestic food group with international presence
Buyer Rationale attractive categories with international growth potential
Seller Rationale realising shareholder value
NBs Lamb Weston specialty potatoes constitute 45% of the foodservice division's sales
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The investment in ConAgra's shares by hedge fund Jana Partners has prompted speculation that the group will sell one of its divisions, in order to realise shareholder value. While the emphasis seems to be so far on ConAgra's troubled private brands business, we believe that the commercial foods unit should be the divestment priority.

Emphasis on Private brands misplaced ...Much of the focus has been directed at the struggling private label foods business of ConAgra. However we believe that's misplaced, not least because the unit is currently loss -making at the EBITDA level (in both 2014 and 3Q 2015), and so technically is not worth anything.

Besides, it appears there's light at the end of the tunnel for the Private brands division. ConAgra predicts that pricing initiatives, improved customer service and cost management will lead to superior performance in fiscal 2016. So the group should focus on completing the turnaround, and full integration of Ralcorp, in its Private brands division.

In the meantime, if Jana Partners or other activist investors are insisting on a more immediate realisation of shareholder value, or faster reduction of indebtedness than the 1 bln US$ currently booked for 2015, then ConAgra should sell its Commercial foods division instead.

... Commercial foods an attractive asset ...The group's Comercial food's business provides branded frozen foods, ingredients and other products to foodservice customers and other food producers. In 2014, 45% of sales from that division were of specialty potatoes, i.e. frozen fries etc, under the Lamb Weston brand.

Having worked briefly with LW in Europe, Glenboden can safely say that specialty potatoes for foodservice is a very attractive business. Dominated by quiet, non-public entities like McCain, Aviko and Farm Frites, it's a defensible market with high entry barriers and strong growth prospects.

That's reflected in the relatively strong performance of the Commercial foods division within ConAgra's portfolio (see profile). Thanks to improvements in price & mix, operating profit is growing to such an extent that Lamb Weston merited a special mention in ConAgra's 2015 third-quarter earnings release.

... divestment addressed to private equity ...Although the Commercial foods division could be an attractive consolidation target for global frozen foodservice groups, our feeling is that the most likely buyers for the unit would be private equity firms, because that division combines both frozen potato and frozen bakery, which tend to be separate in the world of strategic players.

Also, the private equity route could allow ConAgra to construct an option agreement with the buyer, whereby the group re-acquires Lamb Weston in future, once it's repaid its debts and sorted out its retail -facing businesses, under an agreed price formula.

The line-up of private equity buyers would probably be led by firms that have a strong presence in the US, and that already have recent portfolio experience in frozen foods assets.

... with several potential buyers if the price is rightThe first candidate that comes to mind is Permira. Having very recently sold its Iglo frozen foods business in Europe to Nomad, it clearly would have some of the expertise necessary to grow Lamb Weston to its full potential. However, wiith an average € 800 mln of equity invested in each of its consumer sector portfolio companies, LW might be too big for Permira (see valuation).

Another, perhaps more likely contender is the giant Blackstone. 75% of its portfolio consists of US companies, including Pinnacle Foods which has a significant frozen presence in US retail. KKR might also be in the frame, as it has been focusing on food & beverages acquisitions recently.

In terms of valuation, we believe that any deal would be at a slight discount to the Iglo deal, in EBITDA multiple terms, inter alia because B2B brands are generally not as strong as B2C ones. In any event, the proceeds from any deal should be enough to allow ConAgra to repay the majority of its debt, and/or return some money to its anxious shareholders.

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THIS LEAD'S VALUATION
Size (€ mln) 6 000
Sector frozen foodservice
Asset Quality US leader branded
Seller large plc
Buyer private equity
P/S 1,1
P/Ebitda 7,5
Type total consideration estimate
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