Lamb Weston Spinoff From ConAgra Takes A Step Forward, Set For This Fall

ConAgra’s (CAG) planned spinoff of its potato product business, Lamb Weston, is making progress. The most recent milestones achieved were the filing of the company’s initial Form 10 and the naming of its top executives. Thomas Werner, currently President of ConAgra’s Commercial Foods business, will become CEO and Tim McLevish, currently a consultant, will become Executive Chairman. Sean Connolly will remain CEO at the parent company, which will be renamed Conagra Brands (note that lower case ‘a’ post-spin!), and when the spinoff is completed in the fall, it will be just the latest transformation of the company during his short time at the top. Mr. Connolly, previously CEO of Hillshire Brands, was named CEO in early 2015 (perhaps due to Jana Partners’ influence) and shortly thereafter began to leave his mark on a company with a long history. One of his most shocking moves was the sale of the company’s private label business at a price less than it had paid for the same unit just three (3!) years earlier. Talk about controversy – that really must have been a tough pill to swallow. He launched a cost cutting plan including laying people off. He continued selling off pieces of the company and then in November 2015 announced the spinoff of Lamb Weston, a unit generating ~$3b of revenue. Here is a breakdown of the product portfolios post-spin:

Lamb Weston’s portfolio will consist of frozen potato, sweet potato, appetizer and other vegetable products, as well as a continued presence in retail frozen products under licensed brands and private brands. With distinct competitive advantages in key geographies, Lamb Weston will leverage this strong foundation to build upon its proven track record of growth. Lamb Weston will focus on opportunities to expand share domestically and accelerate international growth, particularly within fast-growing emerging markets.

Conagra Brands will be comprised primarily of the operations currently reported as ConAgra Foods’ Consumer Foods segment, as well as the Foodservice business (minus the recently divested Spicetec Flavors & Seasonings and JM Swank businesses), which is currently reported in theCommercial Foods segment. The Consumer Foods segment consists of popular leading brands such as Marie Callender’s, Hunt’s, RO*TEL,Reddi-wip, Slim Jim, PAM, Chef Boyardee, Orville Redenbacher’s, P.F. Chang’s and Healthy Choice. Conagra Brands’ core strategy will focus on further strengthening its consumer and foodservice portfolios, driving innovation and improving margins.

Mr. Connolly justified the transaction with some classic spinoff arguments:

The separation will enable each company to sharpen its strategic focus and provide flexibility to capitalize on the unique growth opportunities in its respective market. Shareholders will gain direct exposure to more focused consumer and commercial foods businesses, each with distinct customer bases and investment profiles. We are confident that this separation will best position each company to compete and win while creating compelling long-term value for shareholders and delivering benefits to employees, customers and other key stakeholders.

Maybe. Are they really such different businesses? Many question the market position of the parent company given many of its brands are positioned in the ‘uncomfortable’ middle between market leaders and cheaper private label options. On the flip side, some believe the split will make both companies more attractive (as a buyer and seller) from an M&A perspective.

One question that has lingered throughout the process is whether or not the company really intends on selling the unit instead of spinning it off. Even at the time of the spinoff announcement, Barron’s highlighted a piece by Citigroup’s David Driscoll suggesting that the move was merely a ploy to seek a buyer for the unit:

Today’s news is not what we expected, as we expected Lamb to be sold (utilizing the capital loss shield), and the proceeds used in a shareholder friendly way. …Is the Split-off a Tactic to Solicit Bids for Lamb? – With ConAgra clearing a path for the separation of its branded foods and Lamb Weston frozen potato businesses, we believe a potential sale of Lamb Weston is still on the table, as ConAgra is signaling to its intention to focus solely on its branded food operations. Thus, it may never actually come to pass that Lamb gets spun-off.

Then came the recent rumors and articles that the company had been in talks with former spinoff Post Holdings (POST) in a deal rumored to value the business at $6b. Despite takeover talks, the transaction’s tax efficiency was still reportedly going to be maintained by utilizing a Reverse Morris Trust. Although Post is best known for its cereals, the company has been expanding its reach over the past few years via acquisitions. The company’s Chairman is the extraordinarily well respected Bill Stiritz, whom some readers may recognize from his profile in the book The Outsiders. Talks seem to have since broken down between the two parties, but they could be revisited further down the line. If a deal were to be consummated between the two companies, it would be rather amusing because ConAgra acquired (and then subsequently divested) Post’s parent company, Ralcorp. CAG and Ralcorp had actually engaged in merger talks prior to Post’s spinoff so in an alternate universe Post could have been united with Lamb Weston under the ConAgra umbrella years ago.

Leaving the hypothetical realm for reality, the spin is expected to be completed this fall and the new company will trade on the NYSE under the ticker ‘LW’. Until then, the intrigue of sale vs. spin will likely remain.

Disclosure: Author currently holds no position in any stock mentioned.