Consumer

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.

It looks like ConAgra Foods has warmed up to the idea of acquisitions.

The Omaha, Nebraska-based company said Wednesday it would separate its Lamb Weston food-service business from its branded foods operations in a tax-free spinoff.

That leaves its consumer business, which will be renamed Conagra Brands, with the full attention of management and the freedom to pursue "smart M&A," ConAgra CEO Sean Connolly said on a call with analysts. Any deal or deals would also have the benefit of the $4.2 billion capital-loss carryforward from the pending sale of ConAgra's private brands arm to Treehouse Foods, which can shield gains from acquisitions for the next five years.

Conagra Brands will, like ConAgra, have an investment-grade credit rating but if a larger portion of existing debt is lumped onto Lamb Weston as expected, the branded foods unit will have further flexibility to fund meaningful acquisitions. Lamb Weston too, could make investments that support export and domestic operations, Connolly said. 

Ready to Lighten the Load
Conagra Brands will likely have less debt than ConAgra Foods
Source: Company Filings and Bloomberg Intelligence

Investors welcomed the planned split and appear optimistic about the opportunities that await both companies. As of mid-afternoon Wednesday, ConAgra shares were having their best day in five months.  

Shareholders shouldn’t be surprised if the Lamb Weston business, best known for the frozen potato products it supplies to fast-food chains such as Wendy's, finds itself a new owner even before the spin.

Profiteering
The operating margins of both businesses remain strong.
Source: Bloomberg Intelligence

“We like to take businesses that other people have declared non-strategic or they've run out of ideas and really be able to drive them further,” said Pinnacle Foods CEO Robert Gamgort in an earnings call last year.  Gamgort reiterated that he's interested in acquiring under-managed frozen-food businesses at the Consumer Analyst Group of New York conference this past March, according to Bloomberg Intelligence analyst Michael Halen.

What's also interesting is that Gamgort and Connolly agreed to a deal in Connolly's past role: as CEO of Hillshire Brands. (That deal, for Hillshire to acquire Pinnacle, was ultimately called off when Hillshire itself became a target,  but that's another story.) 

Even if Pinnacle or other rivals don’t take the bait, private-equity firms -- which have raised record piles of capital -- may be among potential suitors because they favor so-called carve-out deals. Such transactions allow them to transform businesses that large public companies are prepared to discard.

Other recent splits which led to deal activity include Symantec’s planned spin of its information management arm Veritas, which turned into a leveraged buyout by Carlyle Group and Baxalta, which received an unsolicited takeover offer from Shire just one month after its split from Baxter International. 

Whatever happens, one thing's for sure: ConAgra plans on getting bigger by first getting smaller.

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