ConAgra’s Cheap Stock May Become Activist Snack: Real M&A

When your biggest acquisition fails to create value and your stock is cheap, brace for an activist.

It’s been a year and a half since ConAgra Foods Inc. completed its $6.7 billion takeover of Ralcorp Holdings Inc. Chief Executive Officer Gary Rodkin predicted “significant value creation.” Instead, Ralcorp contributed to a $681 million writedown and ConAgra’s shares are trading at pre-deal levels. The maker of Chef Boyardee is now valued at a 36 percent discount to its peer group and is the worst performing food-products maker in the Standard & Poor’s 500 Index this year, according to data compiled by Bloomberg.

As ConAgra tries to prove it can grow the Ralcorp business that sells foods under supermarket brands, activists may consider stepping in, said Rhino Trading Partners LLC, which sees a breakup as a way to unlock value. Edward Jones & Co. says calls for a management shakeup are also possible. The $12 billion company could instead sell some brands to help pay down debt because acquisition targets have been fetching valuations much higher than ConAgra’s amid this year’s surge in food deals, said JPMorgan Chase & Co.

“The activists are probably doing their work right now and running the numbers,” Timothy Chen, a New York-based analyst at Rhino Trading, said in a phone interview. “This is the sort of situation that really speaks to them: an undervalued company where they can provide strategic direction. It’s a textbook case study for them.”

Going Nowhere

Teresa Paulsen, a spokeswoman for Omaha, Nebraska-based ConAgra, said in an e-mail yesterday that the company is “confident in our portfolio and our strategy. We continue to believe that our balanced combination of a significant branded, large private brand, and important commercial food business positions us to win in the marketplace and deliver sustainable, profitable growth for our shareholders.”

Before the takeover of Ralcorp was announced on Nov. 27, 2012, the company’s shares traded for $28 and change. They ended at about that level yesterday, closing at $28.73. During that period, the S&P 500 Food Products Index surged 37 percent.

Today, ConAgra shares rose 0.4 percent to $28.83 at 10:30 a.m. New York time.

ConAgra has a price-earnings ratio of about 14. That’s 36 percent below the median multiple for North American food manufacturers valued at more than $1 billion, data compiled by Bloomberg show.

The company’s branded products include Healthy Choice soups, Banquet frozen meals and Hunt’s ketchup. Buying Ralcorp expanded its private-label foods business, which at the time CEO Rodkin said was “going to be probably the biggest growth vector in the food industry for years to come.”

Disappointing Results

On June 18, ConAgra pre-announced results for its fiscal fourth quarter, saying that operating profit for the private-label business declined by about $60 million and that the unit’s profit will fall short of original projections for the next several years. It reported a $681 million non-cash charge, most of which related to the private-label business.

ConAgra’s consumer branded-foods business also had a 7 percent decline in quarterly volume. The company released its formal earnings statement today, in which Rodkin said, “We are disappointed with fiscal 2014 overall, and we have a very focused sense of urgency directed toward improving our results.”

The stock rose 0.9 percent to $29 at 7:44 a.m. New York time in trading before exchanges opened.

The Ralcorp acquisition “just hasn’t gone anywhere close to what they had hoped,” Jack Russo, an analyst at Edward Jones in St. Louis, said in a phone interview. It’s possible that ConAgra could draw an activist’s attention because “the stock stands out like a sore thumb at a time when a lot of food stocks and consumer-staples stocks are doing really well.”

Deal Feast

The gains in food stocks this year are due in part to a rise in industry acquisitions. Almost $18 billion of takeovers of North American food companies were announced in May, including Hillshire Brands Co.’s now-dead offer for Pinnacle Foods Inc. that led to a bidding war for Hillshire, making it one of the busiest months in the past decade, according to data compiled by Bloomberg.

ConAgra could capitalize on the deal activity by selling some of its brands to reduce debt, Ken Goldman, a New York-based analyst at JPMorgan, said in a June 23 report. The company’s debt was 4.5 times its trailing 12-month earnings before interest, taxes, depreciation and amortization as of February, versus a ratio of 2.4 before it bought Ralcorp, data compiled by Bloomberg show.

Brand Value

Goldman noted that recent transactions have involved protein products such as meat and that ConAgra could sell its protein brands such as Hebrew National hot dogs, Wolf chili and Egg Beaters. Tyson Foods Inc. is purchasing sausage maker Hillshire for about 18 times Ebitda, compared with ConAgra’s multiple yesterday of about 10, the data show.

“Lately, there have been numerous food industry acquisitions at valuations well above ConAgra’s,” Goldman wrote. “We do not think it is unreasonable to ask whether, given his company’s need to pay down debt, Mr. Rodkin might consider divesting certain brands.”

Splitting up the company -- with a push from an activist investor -- is another possibility, according to Chen of Rhino Trading. In fact, Ralcorp provided an example of how un-doing a merger could unlock value when it was a stand-alone, he said.

Ralcorp acquired Kraft Foods Inc.’s Post cereals business in a $2.7 billion deal that closed in August 2008. It then spun Post back out as a separate publicly traded company in early 2012 in a move that created gains for shareholders.

“Ralcorp’s share price did extremely well even though they botched an acquisition,” Chen said. It “serves as a roadmap, so to speak, for activist investors who saw how successful that was.”

Ralcorp Roadmap

It may not be the time to consider such a step. Keeping ConAgra and Ralcorp together makes “strategic sense” because it enhances the company’s relationship with retailers, Erin Lash a Chicago-based analyst at Morningstar Inc., said in a phone interview. It also may be too early to draw interest from an activist, given that the Ralcorp deal closed less than two years ago, she said.

That said, an activist has targeted Ralcorp in the past. The company agreed in 2012 to sell itself to ConAgra partly because of increased pressure from Corvex Management LP, the activist-investing group run by Keith Meister, people familiar with the matter said at the time. Ralcorp had spurned offers for $82 and $86 a share in 2011, before the Post spinoff. ConAgra ended up paying $90 a share.

‘Too Much’

Even after ConAgra incurs the $681 million of asset impairment charges, its goodwill-to-assets ratio will be about 39 percent, which is still higher than the average 27 percent for its U.S. food peers and the S&P 500’s 12 percent, according to Ken Shea, an analyst for Bloomberg Industries.

That writedown is “admittance right there that it hasn’t gone well and perhaps they paid a little bit too much for what they were getting,” Russo of Edward Jones said. “It’s up to these guys to get the ship going in the right direction.”