ConAgra Foods - Acquisition-Based Strategy Has Yet To Create Shareholder Value

| About: ConAgra Brands, (CAG)

ConAgra Foods (CAG) announced on Monday that it acquired the Bertolli and P.F. Chang's Home Menu frozen meals business from Unilever (UN), for a total deal value of $265 million.

The Deal

ConAgra Foods, the food company known from its brands, Banquet, Chef Boyardee, David Seeds, Healthy Choice and Snack Pack, announced that it agreed to acquire Bertolli and P.F. Chang's Home Menu frozen meals from Unilever. ConAgra pays $265 million for the businesses which generate $300 million in annual sales.

The acquisition of the licensing rights for Bertolli and P.F Chang's frozen food business, will boost the product portfolio of ConAgra. Unilever will retain the Bertolli trademark and it continues to hold its pasta sauce business in Kentucky and manufacturing site in Owensboro.

ConAgra has been on an acquisition spree in the latest year. Over the past year the company purchased National Pretzel Company, Del Monte Canada, Odom's Tennessee Pride and Kangaroo Brands.

CEO Gary Rodkin commented on the acquisition, "Bertolli and P.F. Chang's multi-serve frozen meals are excellent additions to our portfolio. We'll use our extensive frozen and innovation capabilities to grow these great brands even further."

ConAgra Foods expect to close the deal within 30-60 days.


For its fiscal year of 2013 the company expects 6-8% growth over its comparable earnings per share of $1.84 in 2012. Earnings per share growth is driven by the impact of acquisitions, growth in its Lamb Weston potato operations and margin management. The company guides for a mid-single rate of inflation.


ConAgra ended its fourth quarter of its fiscal 2012 with roughly $103 million in cash and equivalents and operates with roughly $2.9 billion in short and long term debt. As such it holds a net debt position of roughly $2.8 billion. For its fiscal year of 2012 the company reported net revenues of $13.3 billion. Net income came in at $468 million, or $1.13 per share.

Based on Friday's closing price of $24.57, the market values the firm at roughly $10 billion, or 0.8 times annual revenues and 21 times annual earnings. This valuation compares to a 2.0 times annual revenue multiple for Kraft Foods (KFT) and 1.5 times annual revenue multiple for H.J. Heinz (HNZ). Both competitors trade at roughly 20 times annual earnings.

Currently ConAgra Foods pays a quarterly dividend of $0.24 per share, for an annual dividend yield of 3.9%.

Investment Thesis

Shares of ConAgra have fallen 7% year to date in 2012 to around $25 per share. Shares have been trading within a $15-$30 trading range over the last decade. Sales have stabilized around the $13 billion level in recent years, however the recent acquisitions will boost revenues in 2013 and beyond. At the same time, the company almost repurchased 10% over the last four years, while gradually raising its annual dividend yield.

The latest acquisition will boost annual revenues by little over 2% in 2013 and marks another acquisition in ConAgra's acquisition driven growth strategy.

Over the last decade ConAgra has failed to consistently deliver strong returns. Shares have trade flat over the last decade and investors have only received their annual dividend yield, which currently runs at 4% per annum. Despite the latest addition I see few reasons to pick up shares for the long term, as the company yet has to demonstrate its capabilities to create value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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