Conagra Brands Inc (NYSE:CAG) announced plans to buy Pinnacle Foods Inc (NYSE:PF) for a value of about $8.1 billion in a cash-and-stock deal. This furthers Conagra’s transformation under CEO, Sean Connolly and its push into frozen foods. Initially the deal is valued at $10.9 billion.
The deal, which pairs brands like Conagra’s Healthy Choice and Pinnacle’s Bird’s Eye would create the second-largest frozen food firm in the United States behind Nestle as analysts at RBC Capital Markets have reported. Conagra has supplied capital into its frozen business, with hope of repackaging and reformulating its products to provide to younger diners.
Shares of both firms were at the bottom in early morning trading on the news, proposing a moderate response to the deal. Pinnacle’s stock decreased 3.94% while Conagra’s shares were down by 6.75%.
The dip may have reflected arbitrage investing activity that regularly comes with deals in which a user funds its purchase with stock. It may also reflect wider concerns about the pressures facing the food industry at large including margin squeezing retailers, slow growth and rising costs.
The firms valued shares
The agreement grades Pinnacle at $68 a share, less than analysts’ before approximation of closer to $75 a share. On a multiple of earnings before depreciation, taxes, interest and amortization basis, the deal graded Pinnacle 16 times, according to analysts at Stifel. This is less than other latest deals like acquisition of Snyder’s-Lance by Campbell Soup.
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Under the deal, Pinnacle shareholders will get $43.11 per share in cash and 0.6494 shares of the common Conagra stock for each share of Pinnacle. Pinnacle shareholders are expected to own an estimated 16% of the combined firm.
The deal’s fulfillment
The agreement is the fulfillment of on-again, off-again talks that the two have had over the years. The agreement comes after activist and investor, Jana Partners, announced a roughly 9% stake in Pinnacle and mentioned it planned to negotiate with the firm about a possible sale. Having previously taken a stake in and pushed for changes at Conagra, Jada has a track record with the pairing.
Connolly, Conagra CEO brings to the agreement his own track record. Previously, Connolly was CEO of Hillshire Brands when it tried to buy Pinnacle in 2014. Hillshire though, ultimately cancelled that deal in favor of a sale to Tyson Foods.
By the end of the year, the deal is targeted to close, but still requires approval from Pinnacle shareholders.