Why The ConAgra Foods Inc (CAG) Spinoff Won’t Fix The Company

money and investingBob Ciura:  ConAgra Foods (NYSE:CAG) stock rose 4% earlier this month after the company announced it would spin off its Lamb Weston food-service business into a separate publicly traded entity. This was the latest in a series of moves by new CEO Sean Connolly to revive the company.


Shares of the food giant are up 14% in the past year, while the S&P 500 index is flat in the same period. That would normally lead investors to believe that the company is performing well, but that is not actually the case.

The stock is up, presumably because investors believe the company’s turnaround is gaining traction. But even though ConAgra is aggressively restructuring itself, its core brands remain in decline.

There is a fundamental shift in consumer eating habits taking place right underneath ConAgra’s feet. So far, the company has not significantly addressed these challenges, and a spinoff by itself does not change that fact.

Moving the Pieces Around

ConAgra will spin off Lamb Weston, which produces frozen potatoes, sweet potatoes, appetizers and other frozen vegetable products. Lamb Weston services primarily restaurants, including fast-food chains. It generated approximately $2.9 billion in revenue in the most recent fiscal year. The remaining company will be called ConAgra Brands.

The ConAgra spinoff comes as a means to try to create value for shareholders. ConAgra has experienced a prolonged slowdown in its three core brands: Healthy Choice, Chef Boyardee and Orville Redenbacher. ConAgra sells a number of other shelf-stable brands like Slim Jim that are also struggling.

Consumers – particularly in developed nations like the United States – are taking a harsher view of processed, pre-packaged foods. Consumers are demanding fresher foods like organics and are increasingly turned off by canned, shelf-stable and frozen goods. This has caught ConAgra by surprise, and the company has posted flat or declining sales in four of the past six quarters.

The announced spinoff comes just weeks after ConAgra sold its private-label business, Ralcorp Holdings, to TreeHouse Foods for $2.7 billion. Investors hailed the move, although it should be noted that ConAgra bought Ralcorp only two years ago for $5 billion. ConAgra’s private-label business posted a $1.4 billion operating loss in fiscal 2015. Ralcorp ended up costing ConAgra billions of dollars in losses, only to be sold for nearly half the original purchase price.

Now the company is trying to significantly cut costs and sell off assets to improve its financial position. In October, ConAgra said it would slash around 1,500 jobs as part of its goal to trim $300 million from its cost structure over the next three years.

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