Conagra to buy Pinnacle Foods for $8.1 billion, creating frozen food powerhouse
Published Jun 27, 2018 15:18
Conagra to buy Pinnacle Foods for $8.1 billion, creating frozen food powerhouse
By Richa Naidu and Aishwarya Venugopal
(Reuters) - Conagra Brands Inc (N:CAG) said on Wednesday it would buy Pinnacle Foods Inc (N:PF) for about $8.1 billion (6.15 billion pounds), trying to grab a bigger share of the snack and frozen food markets amid fierce competition in the packaged food industry.
The cash-and-stock deal would create a powerhouse with a combined market capitalisation of $23 billion and Conagra adding such brands as Birds Eye and Hungry-Man frozen foods and Vlasic pickles to its product lineup.
Conagra stock was down 6.3 percent to $35.80 and Pinnacle fell 3.8 percent to $65.27 in early trading.
The deal comes as shoppers opt for healthier foods instead of processed items and as profit margins in the industry have been squeezed by higher commodities and transportation costs.
Chicago-based Conagra, whose lines include Healthy Choice, Orville Redenbacher's, Peter Pan, Chef Boyardee and Egg Beaters, said the two packaged food companies would have reported a combined $11 billion in full-year proforma net sales. It expects to save about $215 million by the end of the fiscal year 2022.
Conagra has been bulking up its frozen food lines, which rake in sales of $2.7 billion, buying such brands as breakfast food maker Sandwich Bros. It has also revamped brands like Banquet's frozen meals by making them with more protein and fewer artificial ingredients as millennials' demand for ready meals has risen.
"The deal will make Conagra a U.S. leader in frozen food, which is the fastest growing category in all of consumable retail," said Burt Flickinger, managing director of consultancy Strategic Resource Group.
"More importantly, Kraft Heinz, Kellogg, Campbell and other large companies are struggling for volumes and this deal will really accelerate Conagra's sales," Flickinger added, saying Pinnacle's Birds Eye brand would be a big boost to sales.
Pinnacle shareholders would get $43.11 per share in cash and 0.6494 Conagra shares for each Pinnacle share, implying an offer price of about $68 a share.
Including debt, the deal is valued at $10.9 billion.
Stifel analyst Christopher Growe said the implied multiple of about 16 times earnings before interest, taxes, depreciation and amortization (EBITDA), or cash flow, for Pinnacle Foods was below his expectations. He added that it was "a bit surprising," given that other recent deals have reached up to 19 times EBITDA, such as General Mills Inc's (N:GIS) purchase of Blue Buffalo.
"We had estimated closer to $75 per share to acquire Pinnacle. We are reviewing our 'buy' rating for Pinnacle Foods and continue with our 'buy' rating for Conagra Brands," he said in a research note.
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The acquisition is a victory of sorts for Conagra Chief Executive Officer Sean Connolly, who had unsuccessfully tried to buy Pinnacle when he was CEO of Hillshire. The sale to Hillshire was cancelled after Hillshire agreed to sell itself to Tyson Foods Inc (N:TSN) for $7.7 billion.
Talks between Conagra and Pinnacle, however, restarted after activist hedge fund Jana Partners LLC in April bought a 9.1 percent stake in New Jersey-based Pinnacle and urged the company to look for a sale.
Pinnacle said Conagra would divest assets from either company accounting for up to $300 million of net sales, if that was needed to receive government antitrust approval. (https://
Analysts at JPMorgan (NYSE:JPM) and Stifel do not see any regulatory hurdles despite overlaps in 44 food categories.
"Our best guess: Perhaps a couple of brands will need to be divested, but the deal – if the two parties agree to combine – likely would pass regulatory muster," JP Morgan analyst Ken Goldman wrote in a note.
Last week, sources told Reuters that Pinnacle had restarted talks about potentially selling itself to its larger peer.
The deal is expected to close by the end of calendar 2018.
Goldman Sachs (NYSE:GS) and Centerview Partners are Conagra's financial advisers, while Evercore and Credit Suisse (SIX:CSGN) are advising Pinnacle.
Also on Wednesday, Conagra reported fourth-quarter net sales rose 5.6 percent to $1.97 billion, beating the average analyst estimate of $1.93 billion, according to Thomson Reuters I/B/E/S. The company earned 18 cents per share in the quarter ended May 27, missing the average analyst estimate of 44 cents.
Written By: Reuters
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