Conagra and Pinnacle Foods

I have discussed my (modest) investment in Conagra Brands (“CAG”) before on this blog. See Investing Diary: CAG and Conagra Brands Update.  This week Jana Partners filed a 13D announcing that they are holders of just under 10% of Pinnacle Foods (“PF”) stock and, essentially, that they are going to be active in promoting a sale of the company.

As I mentioned before, Jana has a position in CAG.  As of 12/31/17, they held a little over 3.2 million shares of CAG, after disposing of 1.7 million shares during Q4 2017.  They also hold calls on about 489,000 shares.  (It was worth checking the actual 13F, versus relying on Nasdaq or Morningstar in this instance).

As I also discussed before, Sean Connolly entered into an agreement to buy PF back when he was CEO of Hillshire Holdings (spin-off from Sara Lee).  They ended up paying a break fee as that agreement got JBS and Tyson off their duffs and into a bidding war for Hillshire, which worked out really nicely for we shareholders.  It did cost a pretty big break-up fee though, like $160 million, if memory serves.

So it looks like Jana may be taking a page from Ackman’s playbook, back when Ackman took a stake in Allergan while holding and active position in Valeant.  Let us hope this works out much better for we CAG shareholders.

PF owns Birds Eye frozen foods (in U.S., Martin Franklin’s Nomad Foods has rights in Europe) Duncan Hines  is (or at least was) a private Blackstone roll-up of CPG brands.  They started with Vlassic and Swanson frozen dinners from Campbell Soup (“CPB”).  I think they have done a nice job renovating the Birds Eye brand.  They also own like Wish Bone dressings and like two brands of maple syrup.

They also bought Boulder Brands a year or two back, which brought them gluten free and more health conscious brands like Udi’s, Glutino and Gardein.   I think they have sort of ceased activity long enough to feel like the trends and accounting have stabilized, so I’m not overly worried about that.

The Potential Deal

I presume that Jana will have to recuse itself from voting CAG shares.  They have about a $687 million position in PF after the pop versus around an $135 million position in CAG.  So, it seems like they have more skin invested in getting a high price for PF rather than a good price for CAG.

After the 10% pop Friday, PF is trading circa 16.5 times trailing 12 month EBITDA and like 14 times consensus forward.  As a (high) comp, CPB paid about 20x Lance-Snyder’s (“LNCE”) trailing EBITDA.

First, the LNCE deal was expensive and CPB has been punished in the media and market for that.  The CEO has now announced her retirement, but the COO is taking over, so it could be unrelated (although that guy has got to think, thanks ever so much for making a huge series of acquisitions, levering the crap out of the balance sheet and then leaving me to take the beating for integration problems).  Anyway, I think LNCE was a more desirable property than PF, but not THAT desirable.  Of course, CPB says they only paid a little over 12x EBITDA after “synergies.” [CPB is down ~ 20% since announcing that deal].

16 times EBITDA is also basically what PF paid for fast (at the time) growing Boulder foods, which has since experienced the obligatory integration problems.  Also, as a “cost of capital”, I can get KHC for 13-14 times EBITDA.  PF seems “fully valued” at 16+ EV/EBITDA.

I think my conclusion is that I’m likely to move to the sidelines on CAG if there are any rumblings of an acquisition of PF at these prices.  I should probably remind myself (and readers) that I got annoyed when Connolly entered into the purchase agreement for PF back when he was a Hillshire, because I thought it was pretty well telegraphed that they were an acquisition target, just waiting out the tax safe-harbor timeframe for spin-offs, but then the bidders came off the sideline and things worked out really well.  So I will try to be very deliberate about any decisions.