I never did like the Ralcorp acquisition.
Message 27353962
Activist Investor Jana Goes After ConAgra Write-downs on private-label business put packaged-food maker in fund’s cross hairs
An activist investor says ConAgra Foods Inc. ’s private-label business is choking the packaged-foods giant. Jana Partners LLC has built a 7.2% stake in ConAgra and is seeking to change its board, in a bid to turn around what the hedge fund said in a regulatory filing has been a disastrous deal: the company’s $5 billion purchase of private-label foods company Ralcorp.
ConAgra, whose brands include Slim Jim jerky, Snack Pack pudding and Hunt’s ketchup, said it plans to talk with Jana after it announces its fourth-quarter earnings on June 30.
“ConAgra Foods’ board of directors and management team are committed to acting in the best interests of all shareholders, and we welcome shareholder engagement,” the company said.
The deal with Ralcorp, struck in late 2012 after it had publicly rebuffed an earlier approach, was billed as a way to spur growth at ConAgra, which was struggling with older brands that were losing ground with consumers.
Coming out of the recession, the business of producing budget-friendly items for grocery stores to market under their own labels was growing faster than grocery sales overall.
But becoming the nation’s largest private-label manufacturer has been harder than ConAgra anticipated, and the business hasn’t lived up to the company’s expectations.
After ConAgra wrote down the value of the private-label unit by another $1.3 billion in March—bringing its total to about $2.2 billion—Jana began buying stock, trying to push the company to review its assets, cut costs and improve its operating performance, according to the hedge fund’s filing. Jana has proposed three board nominees to the company, including its founder, Barry Rosenstein, and former executives from General Mills Inc. and Nestlé SA.
The New York-based fund, which manages more than $11 billion in assets, has successfully advocated changes and pushed for board representation at several investments without a proxy fight in recent years.
But Jana said it is prepared to launch such a fight if it can’t reach a deal with the company.
ConAgra said Thursday it delayed a deadline for investors to nominate directors to July to give both sides time to talk.
The Omaha-based company, which has a market capitalization of about $16.6 billion, has acknowledged that the Ralcorp deal has been a disappointment.
Ralcorp’s sale was initially prompted by another activist hedge fund, Corvex Management LP, which publicly urged the company to sell itself in August 2012, three months before ConAgra agreed to buy it.
The private-brands business has “obviously been disappointing for all of us here at ConAgra,” Thomas McGough, head of the consumer-foods division, said on a conference call in March. “This has been more difficult and taken longer than we anticipated and planned.”
Analysts on that call peppered ConAgra executives with questions about its low margins and the private-label group’s results, while one expressed skepticism that the plans management proposed were enough.
“When I’m an outsider and I hear that one of the key differences will be faster graphics changes on packages, I’ll be honest, that doesn’t really excite me that much,” said Kenneth Goldman of J.P. Morgan Chase & Co.
ConAgra executives have said the private-label industry is still growing, and that Ralcorp simply had issues that turned out to be worse than ConAgra anticipated.
The industry, however, has become more competitive in recent years, as more food makers are offering to make private-label products to fill unused capacity at their factories as packaged food demand lags overall. Also, grocers are demanding higher quality for the same price, hurting manufacturers’ profitability. ConAgra experienced this when it had to lower Ralcorp’s prices to win back customers.
In April, ConAgra announced the head of the private label was leaving the company.
ConAgra’s new chief executive, Sean Connolly, who started that month, has said he will brief investors on his plans and strategy after he spends some time learning the company. Gary Rodkin, the former CEO who was responsible for the Ralcorp deal, promised to get the business on track before leaving earlier this year but couldn’t deliver.
For the quarter ended in February, ConAgra reported that sales fell 1.8% to $3.9 billion, with private-label sales dropping 4.7%. It had a $952.7 million loss in the quarter, largely because of the write-down, after earning $236.9 million a year earlier.
The stock has had a total return of 30% since the Ralcorp deal closed in January 2013, trailing the S&P 500’s 46% return over the same period. The stock rose 7% to $41.50 in after-hours trading Thursday.
Bernstein analysts last month recommended that ConAgra sell the private-label business sooner, rather than later, saying it could command a price of around $3.5 billion. It also suggested the company sell its commercial-foods business, which sells products to hotels, hospitals and other institutions, leaving only the traditional grocery business at ConAgra.
In Thursday’s filing, Jana said the company should review its various assets and its capital allocation. ConAgra has said it is focusing on reducing its debt levels before increasing its share repurchases or dividends.
For ConAgra’s board, Jana has lined up Brad Alford, the former CEO of Nestlé USA, and James A. Lawrence, a former CFO of General Mills and Unilever. It has also hired as a consultant Diane Dietz, the former head of private label at grocery-store chain Safeway Inc., where Jana successfully advocated for a sale of the company.
wsj.com |
