Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

How soon after ConAgra undoes a disappointing acquisition should it go on the hunt again?   

Less than three years after the foodmaker bought Ralcorp Holdings in its biggest purchase, it has cut the cord, agreeing to sell the vast majority of its private-label business for $2.7 billion. Not a great outcome, given that it forked out $5 billion for Ralcorp, while taking on its debt.

ConAgra is unlikely to rush into another big deal, but it's said that time heals all wounds. Plus, a capital-loss carryforward may provide some incentive. ConAgra said the loss, of about $4.2 billion, will have an associated tax value of $1.6 billion, which will shield gains from acquisitions for the next five years.

So what brands should ConAgra add to its pantry? ConAgra CEO Sean Connolly, who took the helm in April, has said it aims to be “more contemporary.” This is a company,  after all, whose  stable of products includes Slim Jim beef jerky, Chef Boyardee canned spaghetti and Marie Callender frozen pot pies.

ConAgra could have a tough time mounting a case that it should acquire another publicly-traded rival. Such a deal would be more compelling if ConAgra's own stock gained ground against its peers: It’s currently trading at a P/E multiple of 18.4, a touch below the median of other North American packaged food companies, according to data compiled by Bloomberg.

But there is another option. Given that proceeds from the sale of its private-label arm will be channeled towards reducing debt, ConAgra will be left with new-found borrowing capacity or enough cash to fund deals for fast-growing companies controlled by private-equity firms like TSG Consumer Partners and VMG Partners. Lesser-known than larger buyout firms such as Blackstone and KKR& Co., they are more focused on scouting the market for early-stage brands that could, once cultivated, be coveted by the likes of Unilever, Coca-Cola or, yes, ConAgra.

TSG, for example, owns a majority stake in Raybern’s, which produces heat-and-serve frozen deli sandwiches including what it says is the "best-selling Philly Cheesesteak sandwich in the U.S," while VMG owns a stake in bare, a maker of healthy snacks such as apple and coconut chips.

ConAgra’s Connolly is familiar with the companies being nurtured by such firms. Last year, in his former role as Hillshire Brands’ CEO, the company paid Catterton $165 million for Van’s International Foods, a maker of frozen waffles and other products.

It’s true that ConAgra has five years to utilize its capital loss, a time frame that will surely see the cycle turn and as discretionary income declines, cause consumers to retreat towards their kitchens and away from restaurants. But to better ready itself for that moment in time, and amid the current merger boom (which has seen the creation of Kraft Heinz as well as smaller combinations like the one announced last week between Snyder’s-Lance and Diamond Foods), ConAgra could find itself getting hungry.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net