Conagra Brands, Inc. CAG, which delivered better-then-expected results for fourth-quarter fiscal 2018, announced a final deal to acquire all shares of Pinnacle Foods Inc. PF for nearly $10.9 billion. Though the buyout is likely to create a robust frozen foods entity, Conagra’s investors appear to be somewhat unenthusiastic.
Evidently, Conagra’s shares tumbled 7.3% yesterday, taking this Zacks Rank #4 (Sell) stock’s year-to-date performance to a decline of nearly 5% compared with the industry’s decline of 6.1%.
Transaction in Detail
The transaction, which will be carried out through a combination of cash and stock, is expected to conclude by the end of 2018, subject to the consent of Pinnacle Foods’ shareholders and other regulatory approvals. It looks like Conagra’s investors’ sentiments were impacted by the stock part of the transaction.
Per the deal terms, stockholders of Pinnacle Foods will receive $43.11 per share in cash along with 0.6494 shares of Conagra for each Pinnacle Foods share. That said, Conagra plans to sponsor the deal with equity of nearly $3.0 billion issued to Pinnacle Foods shareholders as well as cash consideration of nearly $7.9 billion is expected to be financed through debt and other sources.
Nevertheless, Pinnacle Foods’ buyout will bring its iconic brands under Conagra’s umbrella, thereby fueling the latter’s multi-year transformation plan and strengthening its presence in the booming frozen foods and snacks space.
Prospects From the Deal
Conagra is most likely to gain from the addition of Pinnacle Foods, which boasts annual net sales of more than $3 billion. Pinnacle Foods’ renowned brands, including Birds Eye, Duncan Hines, Earth Balance, EVOL and Glutino, among others, will expand Conagra’s scope in the fast-growing frozen foods and snacks space.
The consolidation of these food companies is likely to create a robust portfolio of leading, iconic and on-trend brands, which will help the combined entity speed up innovation and exploit the long-term benefits. Further, given that Pinnacle Foods and Conagra Brands are two of the fastest-growing consumer packaged food firms (by consumption), the deal is expected to enhance Conagra’s growth momentum.
The companies’ complementary portfolios, cultures and supply chain, is likely to ease Pinnacle Foods’ integration into Conagra, which has a solid strategic buyout record. Coming to numbers, Conagra anticipates to generate annual run-rate cost synergies of roughly $215 million, by the end of fiscal 2022. In this regard, the company expects one-time costs of nearly $355 million, which includes anticipated capital expenditures of nearly $150 million.
Also, Conagra Brands expects this deal to augment fiscal 2020 adjusted earnings per share growth by low-single digits. Further, Conagra’s bottom-line in the year ended May 2022 is expected to receive a high single-digit boost from this consolidation. Markedly, Conagra intends to retain its existing annual dividend per share rate during fiscal 2019, owing to Pinnacle Foods’ buyout. Further, the company stated that it will make buybacks under its current authorization as and when it is appropriate, given its focus on prioritizing leverage goals.
All said, we expect this combination to be a deemed fit, especially at a time when demand for the frozen foods and snacks category is perking up.
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